Estados Financieros Consolidados 2001

WORLDCOM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31,2001

(9) Contingencies-

included loss contingencies in other current liabilities and other liabilities for these matters in our financial statements. In some instances, rulings by federal, state and international regulatory authorities may result in increased operating costs to us. The results of these various legal and regulatory matters are uncertain and could have a material adverse effect on our consolidated results of operations or financial position.

We are involved in legal and regulatory proceedings that are incidental to our business and have

Regulation

We are subject to varying degrees of federal, state, local and international regulation. In the United States, our subsidiaries are most heavily regulated by the states, especially for the provision of local exchange services. Our subsidiaries must be certified separately in each state to offer local exchange and intrastate long distance services. No state, however, subjects us to rate of return regulation, nor are we currently required to obtain FCC authorization for installation or operation of our network facilities used for domestic services, other than licenses for specific multichannel multipoint distribution services, wireless communications service and terrestrial microwave and satellite earth station facilities that utilize radio frequency spectrum. FCC approval is required, however, for the installation and operation of our international facilities and services. We are subject to varying degrees of regulation in the foreign jurisdictions in which we conduct business, including authorization for the installation and operation of network facilities. Although the trend in federal, state and international regulation appears to favor increased competition, no assurance can be given that changes in current or future regulations adopted by the FCC, state or foreign regulators or legislative initiatives in the United States or abroad would not have a material adverse effect on us.

In August 1996, the FCC established nationwide rules pursuant to the Telecommunications Act of 1996, or the Telecom Act, designed to encourage new entrants to compete in local service markets through interconnection with the traditional local phone companies, resale of traditional local phone companies’ retail services, and use of individual and combinations of unbundled network elements, owned by the traditional local phone companies. Unbundled network elements are defined in the Telecom Act as any “facility or equipment used in the provision of a telecommunication service,” as well as “features, function, and capabilities that are provided by means of such facility or equipment.” In January 1999, the Supreme Court of the United States confirmed the FCC’s authority to issue the rules, including a pricing methodology for unbundled network elements. On remand, the FCC clarified the requirement that traditional local phone companies make specific unbundled network elements available to new entrants. The traditional local phone companies have sought reconsideration of the FCC’s order and have petitioned for review of the order in the United States Court of Appeals for the D.C. Circuit. That case is pending.

In its January 1999 decision, the Supreme Court remanded to the United States Court of Appeals for the Eighth Circuit various substantive questions concerning the FCC’s rules for pricing unbundled network elements. In July 2000, the Eighth Circuit upheld the use of a forward-looking methodology but struck down the portion of the rule that calculates costs based on efficient technology and design choices. At the request of various parties, including us, the Supreme Court is reviewing the Eighth Circuit’s decision. The Supreme Court heard oral argument in October 2001, and a ruling is expected in the first half of 2002.

F-27


DECEMBER 31,2001

(9) Contingencies- (Continued)

In December 1999, the FCC concluded that in providing high-speed digital subscriber line services, the incumbent local phone companies should be required to share primary telephone lines with competitive local exchange carriers, and the FCC identified the high frequency portion of the loop as a network element. In January 2001, the FCC clarified that the requirement to share lines applies to the entire loop, even where the traditional incumbent local phone company has deployed fiber in the loop. Under the order, the incumbent local phone companies must permit competing carriers to self- provision or partner with a data carrier in order to furnish voice and data service on the same line. The incumbent local phone companies have appealed these two rulings and we have intervened in support of the FCC.

Rulemaking, seeking to streamline and simplify the requirements imposed on traditional local phone companies with respect to unbundled network elements, broadband Internet access, and advanced services. Comments are due during the spring of 2002, and decisions are expected before the end of 2002. WorldCom cannot predict the outcome of these proceedings. However, if regulations are streamlined or removed, there are elements and combinations of elements upon which WorldCom relies to provide local services, broadband and advanced services that might no longer be required as a matter of federal regulation.

The Telecom Act requires traditional local phone companies to petition the FCC for permission to offer long distance services for each state within their region. Under section 271 of the Telecom Act, for these applications to be granted, the FCC must find, among other things, that the traditional phone company has demonstrated that it has satisfied a 14-point competitive checklist to open its local network to competition and that granting the petition is in the public interest. To date, the FCC has rejected five traditional local phone company applications and it has granted ten: Verizon’s for New York, Massachusetts, Connecticut, Pennsylvania and Rhode Island and SBC’s for Texas, Kansas, Oklahoma, Missouri and Arkansas. WorldCom and other competitive carriers appealed to the D.C. Circuit the approvals for Kansas, Oklahoma and Massachusetts. On December 28, 2001, the D.C. Circuit decided that the FCC had not adequately addressed whether the prices charged for leasing network elements by SBC in Kansas and Oklahoma create a price squeeze which violated the standards for SBC to gain long distance approval. Without vacating the approval, the D.C. Circuit remanded the case to the FCC for it to address the price squeeze issue. A briefing schedule has not been established for the Massachusetts appeal. BellSouth has filed applications to offer long distance service for Georgia and Louisiana, and Verizon has filed applications for Vermont and New Jersey. Other applications may be filed at any time. We have challenged, and will continue to challenge, any application that does not satisfy the requirements of section 271 or the FCC’s local competition rules. To date, these challenges have focused on the pricing of unbundled network elements and on the adequacy of the traditional local phone companies’ operations support systems. In addition, legislation has been introduced in Congress that would have the effect of allowing traditional local phone companies to offer in-region long distance data services without satisfying section 271 of the Telecom Act and/or of making it more difficult for competitors to resell incumbent local phone company high-speed Internet access services or to lease the unbundled network elements used to provide these services. To date, WorldCom and others have successfully opposed these legislative initiatives.

In February 1999, the FCC issued a Declaratory Ruling and Notice of Proposed Rulemaking regarding the regulatory treatment of calls to Internet service providers. Prior to the FCC’s order, over

In December 2001 and February 2002, the FCC issued a series of Notices of Proposed

F-28


DECEMBER 31,2001


thirty state public utility commissions issued orders finding that carriers, including us, are entitled to collect reciprocal compensation for completing calls to Internet service providers under the terms of their interconnection agreements with traditional local phone companies. Many of these public utility commission decisions were appealed by the traditional local phone companies and, since the FCC’s order, many traditional local phone companies have filed new cases at the public utility commissions or in court. We petitioned for review of the FCC‘s order in the D.C. Circuit, which vacated the order and remanded the case to the FCC for further proceedings. In April 2001, the FCC issued an Order on Remand and Report and Order asserting jurisdiction over calls to Internet service providers and establishing a three-year transitional scheme of decreasing reciprocal compensation rates. We filed a petition for review of the FCC’s order with the D.C. Circuit, and the Court heard oral arguments on February 12,2002.

all of that spectrum to other services. If this re-allocation were to occur, we cannot predict whether current deployment plans for our multi-channel multipoint distribution service services will be sustainable.

It is possible that spectrum rights held may be disrupted by FCC decisions to re-allocate some or

Litigation In November 2000, class action complaints were filed in the United States District Courts for the

Southern District of Mississippi, the Southern District of New York, and the District of Columbia against WorldCom and some of our executive officers. All of these actions were consolidated in the Southern District of Mississippi on March 27, 2001, along with another purported class action lawsuit filed on behalf of individuals who purchased stock in Intermedia between September 5 and November 1, 2000, which action asserts substantially similar claims and alleges that after the announcement of the WorldCom-Intermedia merger, the price of Intermedia stock was tied to the price of WorldCom stock. On June 1, 2001, the plaintiffs filed a consolidated amended complaint. Among other things, the consolidated amended complaint alleged that statements regarding WorldCom’s revenues, the integration of MCI, the success of UUNET Technologies, and the expansion of WorldCom’s network were false; WorldCom’s financial disclosures were false; and WorldCom’s announcement of its “generation d ’ initiative was misleading. Based on these allegations, the consolidated amended complaint asserts claims for violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule lob-5 promulgated thereunder and Section 20(a) of the Securities Exchange Act of 1934. The consolidated amended complaint seeks to certify a class of persons who purchased WorldCom shares between February 10, 2000 and November 1, 2000, inclusive; it does not assert separate claims on behalf of purchasers of Intermedia shares. On August 7, 2001, WorldCom and the individual defendants filed a motion to dismiss the consolidated amended complaint in its entirety. We believe that the factual allegations and legal claims asserted in the consolidated amended complaint are without merit and intend to defend them vigorously.

Columbia, as class actions on behalf of purchasers of MCI shares. The three cases were consolidated on April 1, 1998. On or about May 8, 1998, the plaintiffs in all three cases filed a consolidated amended complaint alleging, on behalf of purchasers of MCI’s shares between July 11, 1997 and August 21, 1997, inclusive, that MCI and some of its officers and directors failed to disclose material information about MCI, including that MCI was renegotiating the terms of the MCI BT merger

In August 1997, three complaints were filed in the United States District Court for the District of

F-29


DECEMBER 31,2001


agreement. The consolidated amended complaint seeks damages and other relief. WorldCom and the other defendants have moved to dismiss the consolidated amended complaint.

(10) Employee Benefit Plans-

Stock Option Plans:

Effective with our recapitalization, each outstanding stock option under our existing stock option plans was converted into a stock option to acquire shares of WorldCom group stock having the same terms and conditions, except that the exercise price and the number of shares issuable upon exercise were divided and multiplied, respectively, by 1.0319. The following information reflects this conversion ratio. We do not maintain a plan for the issuance of MCI group stock options. We have several stock option plans under which options to acquire up to 919 million shares of WorldCom group stock may be granted to directors, officers and employees of WorldCom including the stock option plans acquired through various acquisitions. As of December 31, 1999,2000 and 2001, outstanding options and warrants to acquire 101 million, 137 million and 202 million shares, respectively, were exercisable. We account for these plans under APB Opinion No. 25, under which no compensation cost is recognized. Terms and conditions of our options, including exercise price and the period in which options are exercisable, generally are at the discretion of the Compensation and Stock Option Committee of our board of directors; however, no options are exercisable for more than 10 years after date of grant. As of December 31, 2001, 586 million options had been granted under these plans.

Additionally, there are outstanding warrants to acquire 2.4 million shares of WorldCom group stock at prices ranging from $20.75 to $45.00 per share which were granted by acquired entities prior to their merger with WorldCom.

Additional information regarding options and warrants granted and outstanding is summarized below (in millions, except per share data):

Number of Weighted- Options and Average

Warrants Exercise Price

Balance, December 31, 1998 ...................... 254 $16.40 Granted to employees/directors .................... 157 45.17 Exercised (63) Expired or canceled (19) Balance, December 31, 1999 ...................... 329 29.63 Granted to employees/directors .................... 112 42.73 Exercised (38) Expired or canceled __ (47) Balance, December 31,2000 ...................... 356 33.95 Assumed in connection with acquisitions . . . . . . . . . . . . . 10 24.59 Granted to employees/directors .................... 91 15.63

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.74 37.79

Exercised (10) Expired or canceled (44) Balance, December 31, 2001 ...................... 403 $29.83

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14.84 29.92 . . . . . . . . . . . . . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15.14 40.27 . . . . . . . . . . . . . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . . . . . . . . . . . . . . ~ ~

F-30


DECEMBER 31,2001

(10) Employee Benefit Plans- (Continued)

Options and warrants to purchase 1 million, 323 million and 370 million shares of WorldCom group stock, were outstanding as of December 31, 1999, 2000 and 2001, respectively, with an exercise price in excess of the respective year end closing market price for WorldCom group stock.

outstanding at December 31, 2001: The following table summarizes information about the WorldCom group options and warrants

Options and Warrants Outstanding Range of Number Remaining Weighted- Exercise Outstanding Contractual Average

$ 0.01 - 16.81 149 6.9 $14.45 16.82 - 33.61 60 5.7 22.11 33.62 - 50.42 193 6.9 43.96 50.43 - 84.03 1 5.3 56.60

Prices (In Millions) Life (Years) Exercise Price

-

403

Options and Warrants Exercisable Number Weighted-

Outstanding Average (In Millions) Exercise Price

60 $12.84 55 23.89 86 44.26 1 56.34 -

202 ___ ___

SFAS No. 123, “Accounting for Stock-Based Compensation”, requires disclosure of the compensation cost for stock-based incentives granted after January 1, 1995 based on the fair value at grant date for awards. Applying SFAS No. 123 to the WorldCom group would result in net income and earnings per share, or EPS, amounts as follows (in millions, except share data):

Net income attributed to WorldCom group before cumulative 1999 2000 2001 ~ _ _ _ _ _

effect of accounting change. ....................... As reported $ 2,294 $ 2,608 $1,407 With 123 1,795 1,844 600

BasicEPS.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Asreported 0.81 0.91 0.48 With 123 0.64 0.64 0.21

Diluted EPS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . As reported 0.78 0.90 0.48 With 123 0.61 0.63 0.20

The fair value of each option is estimated on the date of grant using an option-pricing model with the following weighted-average assumptions used for grant:

Weighted- Expected Risk-free Average Grant-

Date Granted Volatility Interest Rate Date Fair Value

1999 26.8% 5.2% $14.91 2000 30.2% 6.3% $16.79 2001 39.7% 4.7% $ 6.53

Additionally, for all options, a 15% forfeiture rate was assumed with an expected life of 5 years and no dividend yield.

401(k) Plans:

WorldCom and its subsidiaries offer our qualified employees the opportunity to participate in one of our defined contribution retirement plans qualifying under the provisions of Section 401(k) of the Internal Revenue Code, or the Code. Each employee may contribute on a tax deferred basis a portion of annual earnings not to exceed $10,500. We match individual employee contributions in selected

F-3 1


DECEMBER 31,2001

(10) Employee Benefit Plans- (Continued) plans, up to a maximum level which in no case exceeds 6% of the employee’s compensation. Expenses recorded by us relating to our 401(k) plans were $108 million, $112 million and $103 million for the years ended December 31, 1999, 2000 and 2001, respectively.

Employee Stock Purchase Plan:

Section 423 of the Code which allows eligible MCI group employees to purchase shares of MCI group stock through payroll deductions not to exceed 15% of the employee’s compensation. The purchase price is 85% of the lower of the fair market value of MCI group stock on the participant’s enrollment date or the exercise date. A maximum of 10 million shares of MCI group stock are authorized for issuance. During 2001 shares totaling 346,000 were issued at an average price of $13.10 per share.

Effective July 1, 2001, we established the MCI group 2001 Employee Stock Purchase Plan under

(11) Pension and Other Post-retirement Benefit Plans-

pension plan, or the Supplemental Plan, and WorldCom International Data Services, Inc., a subsidiary of MCI, has a defined benefit pension plan. Collectively, these plans cover substantially all MCI employees who became WorldCom employees as a result of the merger with MCI and who work 1,000 hours or more in a year. Effective January 1, 1999, no future compensation credits are earned by participants of the MCI Plan.

service cost is amortized on a straight-line basis over the average remaining service period of employees. As of December 31, 2000, the fair value of MCI Plan assets exceeded the MCI Plan accumulated benefit obligation by $42 million. As of December 31, 2001, the accumulated benefit obligation exceeded the fair value of the plan assets by $21 million. There is no additional minimum pension liability required to be recognized.

Additionally, Embratel sponsors a contributory defined benefit pension plan and a post-retirement benefit plan. Annual service cost is determined using the projected unit credit actuarial method. Approximately 95% of Embratel’s full-time employees are covered by these plans. The defined benefit pension plan had a fair value of assets in excess of accumulated benefit obligation of $3 million at December 31, 2000. There is no additional minimum pension liability to be recognized.

In April 1999, we completed the sale of MCI Systemhouse Corp. and SHL Systemhouse Co. to EDS for $1.6 billion resulting in a settlement gain of $24 million and benefit payments of $80 million.

The following table sets forth information for the MCI pension plans and, for the year ended December 31, 2000, the Embratel defined benefit pension and post-retirement plans’ assets and obligations (in millions):

We maintain a noncontributory defined benefit pension plan, or MCI Plan, and a supplemental

Annual service cost is determined using the Projected Unit Credit actuarial method, and prior

F-32

WORLDCOM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31,2001

(11) Pension and Other Post-retirement Benefit Plans- (Continued)

Change in Benefit Obligation Benefit obligation at January 1, 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Senicecost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Actuarialloss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Benefitspaid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Planamendments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign currency exchange . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Assumption change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Benefit obligation at December 31, 2000. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Actuarial gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Assumption change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Benefit obligation at December 31, 2001. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Change in Plan Assets Fair value of assets at January 1, 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Actual return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign currency exchange . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fair value of assets at December 31, 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Actual return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Effect of settlement/transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fair value of assets at December 31, 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . As of December 31, 2001: Funded status . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unrecognized net actuarial gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unamortized prior service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued benefit cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Weighted-average actuarial assumptions: Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Expected return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Rate of compensation increase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . As of December 31,2000: Funded status . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unrecognized net actuarial (gain) loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unamortized prior service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unrecognized transition liability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued benefit cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Weighted-average actuarial assumptions: Discountrate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Expected return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Rate of compensation increase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Benefitspaid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

MCI Pension Plans

$476

35 8

-

(59) - 4 3

467 32

$455 ~ ~

$ 7 (17)

6

7.25% 9.00% N/A

$ 75 (102)

7

7.50% 9.00% N/A

Embratel Plans Pension Other Benefits Benefits ~ _ _ _

$361 $ 29 57 5

(31) (2) (30) ~ (4) 357 28 * *

* * * * * *

6.00% 6.00% 9.00% 9.00% N/A N/A

* Information is not provided as a result of the Embratel deconsolidation effective January 1, 2001.

F-33


DECEMBER 31,2001

(11) Pension and Other Post-retirement Benefit Plans- (Continued)

December 31, 1999, 2000 and 2001 are as follows (in millions): The components of the net post-retirement benefit and pension costs for the years ended

Service cost. ..................... Interest cost on accumulated post-

retirement benefit obligation . . . . . . . . Expected return on plan assets . . . . . . . . Amortization of transition obligation. . . . Amortization of net loss (gain) . . . . . . . . Net periodic post-retirement benefit cost . (12) Income Taxes-

MCI Pension Plans

$ 1

1999 Embratel

Pension Other Benefits Benefits _ _ _ ~

$ 1 $-

MCI Pension Plans

$ -

35 (49)

2000 2001

MCI Pension Pension Other Benefits Benefits Plans

Embra tel

_ _ _ _ _ _ _ _ $ - $- $ -

The provision for income taxes is composed of the following (in millions):

1999 2000 2001 ~ _ _ _ ~ Current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 62 $1,376 $ (177) Deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,903 1,649 1,104 _ _ _ ~ _ _ _ _ Total provision for income taxes . . . . . . . . . . . . . . . . . . . $2,965 $3,025 $ 927 ~ _ _ _ _ ~ _ _ _ _ _ ~

The following is a reconciliation of the provision for income taxes to the expected amounts using the statutory rate:

Expected statutory amount . . . . . . . . . . . . . . . . . . . . . . . Nondeductible amortization of excess of cost over net

tangible assets acquired . . . . . . . . . . . . . . . . . . . . . . . . State income taxes ............................. Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tax credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Actual tax provision . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1999 2000 2001 _ _ _ _ _ _ _ _ _ 35.0% 35.0% 35.0%

5.2 5.0 13.7 2.5 2.6 (5.0)

(0.2) (0.4) (2.9) 0.4 (2.2) (2.1)

41.4% 40.0% 38.7%

(1.5) - -

-~ ~ __

~ _ _ _ ~ ~ _ _ _ ~

F-34


DECEMBER 31,2001

(12) Income Taxes- (Continued)

as of December 31, 2000 and 2001 (in millions): The following is a summary of the significant components of our deferred tax assets and liabilities

2000

Fixed assets . . . . . . . . . . . . . . . . . . . . . . . . . Goodwill and other intangibles . . . . . . . . . . . Investments . . . . . . . . . . . . . . . . . . . . . . . . . Other assets. . . . . . . . . . . . . . . . . . . . . . . . . Accrued liabilities ..................... NOL carryforwards. . . . . . . . . . . . . . . . . . . . Tax credits . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Valuation allowance . . . . . . . . . . . . . .

Assets Liabilities _ _ _ ~

$ - $(4,779) (122)

(264)

- 363 -

643 - 517 - 760 - (366)

-

-

~ _ _ _ 2,283 (5,531)

_ _ _ ~ $2,092 $(5,531)

- (191) _ _ _ _ _ _

~~

2001 Assets Liabilities

$ - $(5,580) (11)

392 - (423)

394 - 1,315 -

686 - (123)

_ _ _ _ _

-

-

-

_ _ _ ~ 2,787 (6,137)

$2,322 $(6,137)

- (465) _ _ _ _ _ _

_ _ ~ ~~

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and amounts used for income tax purposes and the impact of available net operating loss, or NOL, carryforwards.

At December 31, 2001, we had unused NOL carryforwards for federal income tax purposes of approximately $3.4 billion which expire in various amounts during the years 2011 through 2021. These NOL carryforwards result in a deferred tax asset of approximately $1.3 billion at December 31, 2001.

Approximately $1.7 billion of NOL carryforwards for federal income tax purposes relate to preacquisition NOL carryforwards attributable to entities acquired in transactions accounted for as purchases. These carryforwards and other deferred tax assets result in deferred tax assets for which a valuation allowance of $433 million has been established. If subsequent events or conditions dictate an increase in the need for a valuation allowance attributable to such deferred tax assets, the income tax expense for that period will be increased accordingly.

In addition, at December 31, 2001 we have unused NOL carryforwards of $85 million outside the United States which generally do not expire. These carryforwards result in a $32 million deferred tax asset for which a valuation allowance has been established.

(13) Supplemental Disclosure of Cash Flow Infonnation-

billion, $1.1 billion and $1.4 billion, respectively. Income taxes paid, net of refunds, during the years ended December 31, 1999, 2000 and 2001 were $106 million, $452 million and $148 million, respectively.

Interest paid by us during the years ended December 31, 1999, 2000 and 2001 amounted to $1.3

F-35


DECEMBER 31,2001

(13) Supplemental Disclosure of Cash Flow Information- (Continued)

In conjunction with business combinations during the years ended December 31, 1999, 2000 and 2001, assets acquired, liabilities assumed and common stock issued were as follows (in millions):

1999 2000 2001 _ _ _ _ _ _ _ _ _ _ _ Fair value of assets acquired ....................... $ 62 $ - $ 1,932 Goodwill and other intangible assets . . . . . . . . . . . . . . . . . 2,231 43 5,102 Liabilities assumed .............................. (987) (29) (4,201) Preferred stock issued or assumed. Common stock issued. Net cashpaid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,078 $ 14 $ 206

- (1,361) (228) - (1,266)

. . . . . . . . . . . . . . . . . . -

.... . . . . . . . . . . . . . . . . . . . . . . . ~~~

_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _

(14) Segment and Geographic Information-

Based on our organizational structure, we operate in six reportable segments: Commercial voice, data and Internet; International operations; Consumer; Wholesale; Alternative channels and small business; and Dial-up Internet. Our reportable segments represent business units that primarily offer similar products and services; however, the business units are managed separately due to the type and class of customer as well as the geographic dispersion of their operations. The Commercial voice, data and Internet segment includes voice, data and other types of domestic communications services for commercial customers, and Internet services including dedicated access and web and application hosting services. International operations provide voice, data, Internet and other similar types of communications services to customers primarily in Europe and the Asia Pacific region. Consumer includes domestic voice communications services for consumer customers. Wholesale includes voice and data domestic communications services for wholesale customers. Alternative channels and small business includes domestic long distance voice and data, agents, prepaid calling cards and paging services provided to alternative wholesale and small business customers. Dial-up Internet includes dial- up Internet access services.

Our chief operating decision-maker utilizes revenue information in assessing performance and making overall operating decisions and resource allocations. Communications services are generally provided utilizing our fiber optic networks, which do not make a distinction between the types of services provided. Profit and loss information for WorldCom, the WorldCom group and the MCI group is reported only on a consolidated basis to the chief operating decision-maker and our board of directors.

F-36


DECEMBER 31,2001

(14) Segment and Geographic Information- (Continued)

significant accounting policies. Information about our segments is as follows (in millions): The accounting policies of the segments are the same as those described in the summary of

Revenues From External Customers Administrative Capital Expenditures

1999 2000 2001 1999 2000 2001 1999 2000 2001

Selling, General and

_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ ~ _ _ _ _ _ _ _ _ _ _ _ _ Voice, data and Internet . . . . . . . . . . . . $14,817 $16,880 $18,371 $2,655 $ 3,209 $ 3,895 $5,532 $ 8,376 $6,505 International operations . . . . . . . . . . . . 1,624 2,367 2,977 774 1,094 1,409 1,494 1,754 1,114 Consumer. . . . . . . . . . . . . . . . . . . . . . 7,590 7,778 7,227 3,275 2,823 2,968 235 146 89

Alternative channels and small business. . 3,142 3,541 2,427 808 1,030 1,092 182 75 109 Dial-up Internet.. . . . . . . . . . . . . . . . . 1,497 1,628 1,536 368 426 537 178 185 37

Other.. 523 - - . . . . - - - (331) (254) (360) - - - Elimination of intergroup expenses.

Embratel . . . . . . . . . . . . . . . . . . . . . . 2,854 3,662 - 610 980 - 893 854 -

Wholesale.. . . . . . . . . . . . . . . . . . . . . 3,943 3,388 2,641 620 538 617 192 94 32

Corporate-other charges - - - - - - 778 888 - . . . . . . . . . . . - 10 - . . . . . . . . . . . . . . . . . . . . . . . - 170 -

~ ~ ~ ~ ~ _ _ _ _ _ _ _ _ _ _ ~ ~ Total before Embratel . . . . . . . . . . 33,136 35,582 35,179 8,339 9,644 11,046 7,823 10,630 7,886

Elimination of intersegment revenue/ - - - .. . . . . . . . . . . . . . . . . . . . (82) (154) - (14) (27) - __________ expenses

Total . . . . . . . . . . . . . . . . . . . . . . $35,908 $39,090 $35,179 $8,935 $10,597 $11,046 $8,716 $11,484 $7,886

As discussed in Note 1, we deconsolidated our investment in Embratel as of January 1, 2001. Embratel, which provides communications services in Brazil, was designated as a separate reportable segment for periods prior to January 1, 2001. Accordingly, we have included Embratel in our segment information presented for 1999 and 2000. Additionally, Other includes the operations of MCI Systemhouse Corp. and SHL Systemhouse Co., which was sold to EDS in April 1999.

to our consolidated results of operations.

_ _ _ _ _ ~ _ _ _ _ _ _ _ _ _ _ _ _ _ ~ ~ ~ _ _ _ _ _ _ ~ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _

See Note 17 for a reconciliation of the WorldCom group’s and the MCI group’s operating results

Information about our operations by geographic areas are as follows (in millions):

1999 ~

Long-lived Revenues Assets _ _ _ ~

United States . . . . . . . . . . . . . . . . . . . $30,721 $21,965 Brazil ......................... 2,772 4,017 Ail other international . . . . . . . . . . . . . 2,415 2,636 Total .......................... $35,908 $28,618

~ _ _ _

_ _ _ _ _ _ _ _ _ _ _ _

2000 Long-lived

Revenues Assets

$32,177 $29,816 3,508 4,008

~ _ _ _

3,405 3,599 $39,090 $37,423 ~ _ _ _ _

~ _ _ _ _ _ ~ _ _ _

2001 Long-lived

Revenues Assets

$31,428 $34,799

3,751 4,010 $35,179 $38,809

_ _ _ _ ~

- - ~~

_ _ _ _ ~ _ _ _ ~

F-37

WORLDCOM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) DECEMBER 31,2001

(15) Unaudited Quarterly Financial Data-

Revenues ........................ Operating income . . . . . . . . . . . . . . . . . Income before cumulative effect of

Net income ...................... Distributions on mandatorily redeemable

preferred securities and other preferred

Income (loss) before cumulative effect of

WorldCom group . . . . . . . . . . . . . . MCI group . . . . . . . . . . . . . . . . . . .

cumulative effect of accounting change: WorldCom g r o u p Basic . . . . . . . . . . . . . . . . . . . . . . . Diluted ...................... MCI g r o u p Basic . . . . . . . . . . . . . . . . . . . . . . . Diluted . . . . . . . . . . . . . . . . . . . . . .

accounting change . . . . . . . . . . . . . . .

dividend requirements . . . . . . . . . . . . .

accounting change attributed to:

Income (loss) per share before

Quarter Ended March 31, June 30, September 30, December 31,

2000 2001 2000 2001 2000 2001 2000 2001 (in millions, except per share data)

$9,612 $8,825 $9,807 $8,910 $10,037 $8,966 $9,634 $8,478

_ _ ~ _ _ _ ~ ~ _ _ _ _ _ _ _

2,424 1,197 2,387 384

1,288 610 1,273 97 1,203 610 1,273 97

17 16 16 16

741 548 732 126 547 62 541 (29)

0.25 0.18 0.25 0.04 0.25 0.18 0.25 0.04

4.80 0.54 4.75 (0.25) 4.80 0.54 4.75 (0.25)

1,852 1,180 1,490 753

951 536 726 258 951 536 726 258

16 43 16 42

599 503 601 347 352 33 125 (89)

0.20 0.16 0.20 0.10 0.20 0.16 0.20 0.10

3.06 0.28 1.09 (0.75) 3.06 0.28 1.09 (0.75)

(16) Related Party ‘lkansactions- We have entered into certain loan and guaranty arrangements involving Bernard J. Ebbers,

WorldCom’s President and Chief Executive Officer, principally relating to certain obligations to financial institutions secured by Mr. Ebbers’ stock in WorldCom. Following recent declines in the closing price of the WorldCom group stock, the outstanding debt covered by the WorldCom guaranty in favor of Bank of America, N.A., or Bank of America, has been repaid and we have deposited with Bank of America approximately $35 million to collateralize a letter of credit used to support financing for which Mr. Ebbers is obligated. The underlying letter of credit is scheduled to expire on February 15, 2003, subject to renewal, extension or substitution.

WorldCom made aggregate payments of approximately $198.7 million to Bank of America pursuant to the guaranty, in addition to the deposit collateralizing the letter of credit. That amount, together with any amounts paid or costs incurred by us in connection with the letter of credit, plus accrued interest at a floating rate equal to that under one of our credit facilities, is payable by Mr. Ebbers to us on demand. The amount of such interest accrued through February 28, 2002, is approximately $875,000 and the interest rate as of that date was 2.15% per annum.

In addition to the guaranty arrangements, we have also agreed to loan up to $165 million in principal amount to Mr. Ebbers. These loans are payable on demand and bear interest at floating rates equal to that under certain of our credit facilities. As of February 28, 2002, the aggregate principal amount of indebtedness owed by Mr. Ebbers to us under these loans was approximately $144.3 million.

F-38


DECEMBER 31,2001

(16) Related Party lkansactions- (Continued) Accrued interest on these loans is approximately $5.5 million through February 28, 2002, at interest rates ranging from 2.14% to 2.16% per annum as of that date.

WorldCom principally to repay certain indebtedness under loans secured by shares of our stock owned by him and that the proceeds of such secured loans were used for private business purposes. The loans and guaranty by WorldCom were made following a determination that they were in the best interests of WorldCom and our shareholders in order to avoid additional forced sales of Mr. Ebbers’ stock in WorldCom. The determination was made by our Compensation and Stock Option Committee as a result of the pressure on our stock price, margin calls faced by Mr. Ebbers and other considerations. Such actions were ratified and approved by our board of directors.

In connection with the transactions described above, and subject to certain limitations, and effective upon termination of restrictions under existing lending agreements, Mr. Ebbers pledged to WorldCom the shares of our stock owned by him with respect to his obligations under the loans and guaranty from WorldCom. The pledge of certain of those shares is subordinated to the prior rights of other lenders and is not currently perfected. Mr. Ebbers also agreed to indemnify WorldCom for any amounts expended or losses, damages, costs, claims or expenses incurred under the guaranty or the loans from WorldCom and has provided information demonstrating that his assets are sufficient to cover his outstanding obligations to us.

(17) Consolidating Information- Below is the consolidating financial information of the WorldCom group and the MCI group. The

financial information reflects the businesses attributed to the WorldCom group and the MCI group including the allocation of revenues and expenses between the WorldCom group and the MCI group in accordance with our allocation policies.

The attribution of the assets, liabilities, equity, revenues and expenses for each group, as reflected in our consolidated financial statements, which are consolidated in accordance with accounting principles generally accepted in the United States, is primarily based on specific identification of the businesses included in each group. Where specific identification was impractical, other methods and criteria were used that our management believes are equitable and provide a reasonable estimate of the assets, liabilities, equity, revenues and expenses attributable to each group. Our shared corporate services and related balance sheet amounts (such as executive management, human resources, legal, regulatory, accounting, tax, treasury, strategic planning and information systems support) have been attributed to the WorldCom group or the MCI group based upon identification of such services specifically benefiting each group. Where determinations based on specific usage alone are impractical, other methods and criteria were used that our management believes are equitable and provide a reasonable estimate of the cost attributable to each group.

Our board of directors or any special committee appointed by the board of directors may, without shareholder approval, change the polices set forth in our tracking stock policy statement. Our board of directors or any special committee appointed by the board of directors also may, without shareholder approval, adopt additional policies or make exceptions with respect to the application of the policies described in our tracking stock policy statement in connection with particular facts and circumstances, all as they may determine to be in our best interests as a whole.

We have been advised that Mr. Ebbers has used, or plans to use, the proceeds of the loans from

F-39


DECEMBER 31,2001

(17) Consolidating Information- (Continued) CONSOLIDATING STATEMENT OF OPERATIONS

(In Millions) Year Ended December 31,1999

WorldCom MCI Group Group Eliminations WorldCom _ _ _ _ _ _ ~

Revenues. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $19,736 $16,172 $ - $35,908 Operating expenses:

Line costs:

~ _ _ _ ~

Attributed costs (1) ....................... 7,841 6,898 - 14,739

Attributed costs (1) ....................... 2,594 3,113 3,228 8,935

- . . . . . . . . . . . . . Intergroup allocated expenses (2) 64 189 (253)

Shared corporate services (3) - . . . . . . . . . . . . . . . . 1,601 1,627 (3,228) . . . . . . . . 331 (331) Other intergroup allocated expenses (4).

Attributed costs (1) ....................... 3,533 82 1 - 4,354

(8) Intergroup allocated expenses (5) (520)

Other charges (8)

(966)

Selling, general and administrative:

- - Depreciation and amortization:

- . . . . . . . . . . . . . 584 - (64)

- .. . . . . . . . . . . . . . . . . . . . . . . . . . . . _ _ _ _ _ _ _ _ _ _ - 28,020 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,105 12,915

Operating income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,631 3,257 - 7,888

. . . . . . . . . . . . . . . . . . . . . . . . . . . 237 5 - 242 Miscellaneous income Income before income taxes and minority interests. . . . . . 4,408 2,756 - 7,164 Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . 1,856 1,109 - 2,965 Income before minority interests . . . . . . . . . . . . . . . . . . . 2,552 1,647 - 4,199 Minority interests Net income before distributions on mandatorily

Distributions on mandatorily redeemable preferred

~ ~ _ _ _

- Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (460) (506) ~ ~ _ _ _ _

~ _ _ _ _ _ _ _

(186) - - .... . . . . . . . . . . . . . . . . . . . . . . . . . . (186) ~ ___ ~

redeemable preferred securities . . . . . . . . . . . . . . . . . . 2,366 1,647 - 4,013

72 . . 72 securities and other preferred dividend requirements. - - ~ ~ _ _ _

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,294 $ 1,647 $ - $ 3,941 ~ _ _ _ ~ ~ _ _ _ _ _ _

(1) Attributed costs represent costs directly incurred by or attributed to the WorldCom group and the MCI group

(2) The WorldCom group was allocated $64 million for its usage of our business voice switches, which have been and do not include any intergroup allocations.

attributed to the MCI group, and the MCI group was allocated $189 million for its usage of our fiber optic systems, which have been attributed to the WorldCom group.

(3) Our shared corporate services (such as executive management, human resources, legal, regulatory, accounting and tax, treasury, strategic planning and information systems support) have been allocated to the WorldCom group and the MCI group in the amounts of $1.6 billion and $1.6 billion, respectively.

(4) The MCI group was allocated $303 million of costs related to its use of buildings, furniture and fktures and $28 million for use of the MCI tradenames, which assets have been attributed to the WorldCom group.

(5) A credit of $492 million and $64 million to depreciation expense has been recorded by the WorldCom group and the MCI group, respectively, to reflect the allocation of a portion of the applicable costs for the use by the WorldCom group of the business voice switches attributed to the MCI group, and the proportionate use by the MCI group of the fiber optic systems and buiIdings, furniture and fixtures attributed to the WorldCom group. Additionally, a credit of $28 million to amortization expense has been recorded by the WorldCom group to reflect the charge to the MCI group for use of the MCI tradenames.

F-40


DECEMBER 31,2001

(17) Consolidating Information- (Continued) CONSOLIDATLNG STATEMENT OF CASH FLOWS

(In millions)

Year Ended December 31. 1999

Cash flows from operating activities: Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Adjustments to reconcile net income to net cash

provided by operating activities . . . . . . . . . . . . . . . . . Net cash provided by operating activities . . . . . . . . . .

Cash flows from investing activities: Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . Acquisitions and related costs . . . . . . . . . . . . . . . . . . . . All other investing activities, net . . . . . . . . . . . . . . . . . .

Net cash used in investing activities . . . . . . . . . . . . . .

Principal repayments on debt, net . . . . . . . . . . . . . . . . . Attributed stock activity of WorldCom, Inc. . . . . . . . . . . Intergroup advances, net . . . . . . . . . . . . . . . . . . . . . . . All other financing activities, net . . . . . . . . . . . . . . . . .

Net cash provided by (used in) financing activities . . . Effect of exchange rate changes on cash. . . . . . . . . . . . . . Net increase (decrease) in cash and cash equivalents. . . . . Cash and cash equivalents beginning of period . . . . . . . . . Cash and cash equivalents end of period . . . . . . . . . . . . .

Cash flows from financing activities:

WorfdCom Group

$2,366

4,986 7.352

(7,929) (786) 670

(8,045)

(2,894)

(72)

(221) (897)

886 2,097

17

1,703 $ 806

MCI Group Eliminations

$ 1,647 $ -

46 24

$ 70

WorldCom

$4,013

6,992 11,005

(8,716) (1,078)

239

(9,555)

F-41


DECEMBER 31,2001

(17) Consolidating Information-(Continued)

CONSOLIDATING BALANCE SHEET (In millions)

at December 31,2000 WorldCom MCI

Group Group Eliminations(1) WorldCom ~ _ _ _ _ _ Current assets.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,092 $ 2,312 $ (649) $ 9,755 Property and equipment, net .................... 35,177 2,246 - 37,423 Goodwill and other intangibles . . . . . . . . . . . . . . . . . . 36,685 9,909 - 46,594

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,131 Other assets 5,939 168 (976) _ _ _ _ ~ Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . ~ _ _ _ _ $85,893 $14,635

_ _ _ ~ $( 1,625) $98,903

Current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . $14,213 $ 4,109 $ (649) $17,673 Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,696 6,000 - 17,696

. . . . . . . . . . . . . . . . . . . . . . . . . 4,735 Noncurrent liabilities. 3,648 2,063 (976) Minority interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,592 - - 2,592 Company obligated mandatorily redeemable preferred

- 798 Shareholders’ investment ....................... 52,946 2,463 - 55,409

securities 798 - ... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ~ _ _ _

Total liabilities and shareholders’ investment . . . . . . . $85,893 $14,635 $( 1,625) $98,903

(1) Represents the elimination of intergroup receivables and payables associated with other intergroup allocations between the WorldCom group and the MCI group. The WorldCom group had a net receivable from the MCI group (and the MCI group had a corresponding net payable to the WorldCom group) of $1.6 billion, of which $649 million was classified as current with the remainder classified as long-term.

F-42


DECEMBER 31,2001


CONSOLIDATING STATEMENT OF OPERATIONS (In millions)

Year Ended December 31, ZOO0 WorldCom MCI

Group Group Eliminations WorldCom ~~

Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $22,755 $16,335 $ - $39,090 Operating expenses:

_ _ _ _ _ _ _ _ _ _ _ ~

Line costs: Attributed costs (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Intergroup allocated expenses (2) . . . . . . . . . . . . . . . . . . . . . . Attributed costs (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Shared corporate services (3) . . . . . . . . . . . . . . . . . . . . . . . . Other intergroup allocated expenses (4) . . . . . . . . . . . . . . . . .

Attniuted costs (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Intergroup allocated expenses (5) . . . . . . . . . . . . . . . . . . . . . .

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Miscellaneous income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income before income taxes, minority interests and cumulative effect

of accounting change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provision for income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income before minority interests and cumulative effect of accounting

change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Minority interests. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income before cumulative effect of accounting change . . . . . . . . . . Cumulative effect of accounting change. . . . . . . . . . . . . . . . . . . . . Net income before distributions on mandatorily redeemable

preferred securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Distributions on mandatorily redeemable preferred securities and

other preferred dividend requirements . . . . . . . . . . . . . . . . . . . . Netincome . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .


Depreciation and amortization:

8,658 87

3,682 2,007 -

3,907 (627)

17,714 5,041

385

4,968 1,990

(458)

2,978

2,673 (305)

(75)

2,598

65

6,804 373

2,981 1,927

254

97 1

13,223 (87)

3,112 (512)

2,600 1.035

1,565 -

1,565 (10)

1,555

- 714

15,462 -

10,597 - -

4,878 -

30,937 8,153

385

7,568 3,025

(970)

4,543 (305) 4,238

(85)

4,153

65 $ 2,533 $ 1,555 $ - $ 4,088

(1) Attributed costs represent costs directly incurred by or attributed to the WorldCom group and the MCI group and do not include any intergroup allocations.

(2) The WorldCom group was allocated $87 million for its usage of our business voice switches, which have been attributed to the MCI group, and the MCI group was allocated $373 million for its usage of our fiber optic systems, which have been attributed to the WorldCom group.


(4) The MCI group was allocated $226 million of costs related to its use of buildings, furniture and fiitures and $28 million for use of the MCI tradenames, which assets have been attributed to the WorldCom group.

(5) A credit of $599 million and $87 million to depreciation expense has been recorded by the WorldCom group and the MCI group, respectively, to reflect the allocation of a portion of the applicable costs for the use by the WorldCom group of the business voice switches attributed to the MCI group, and the proportionate use by the MCI group of the fiber o tic systems and buildings, furniture and fixtures attributed to the WorldCom group. Additionally, a credit of &8 million to amortization expense has been recorded by the WorldCom group to reflect the charge to the MCI group for use of the MCI tradenames.

F-43


DECEMBER 31,2001


CONSOLIDATING STATEMENT OF CASH FLOWS (In millions)

Year Ended December 31. 2000

Cash flows from operating activities: Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Adjustments to reconcile net income to net cash provided

by operating activities ......................... Net cash provided by operating activities . . . . . . . . . .

Cash flows from investing activities: Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . Acquisitions and related costs . . . . . . . . . . . . . . . . . . . . . All other investing activities, net . . . . . . . . . . . . . . . . . . .

Net cash used in investing activities . . . . . . . . . . . . . . Cash flows from financing activities: Principal borrowings on debt, net . . . . . . . . . . . . . . . . . . .

Intergroup advances, net ......................... All other financing activities, net . . . . . . . . . . . . . . . . . . .

Net cash provided by (used in) financing activities . . . Effect of exchange rate changes on cash. . . . . . . . . . . . . . Net decrease in cash and cash equivalents . . . . . . . . . . . . Cash and cash equivalents beginning of period . . . . . . . . . Cash and cash equivalents end of period . . . . . . . . . . . . .

Attributed stock activity of WorldCom, Inc. . . . . . . . . . . .

WoddCom Gronp

$ 2,598

2.732 5.330

(10,984) (14)

(2,614) (13,612)

6,377 585

1,592 (339)

MCI Gronp

$ 1,555

781 2,336

(273) (773)

-

(1,592)

8,215 (19) (86) 806

$ 720

(1,592)

Eliminations

$ -

WorldCom

$ 4,153

3,513 7,666

(1 1,484) (14)

(2,887) (14,385)

6,377 585 -

(339)

(19) (115)

6,623

876 $ 761

F-44


DECEMBER 31,2001


CONSOLIDATING BALANCE SHEET (In millions)

At December 31, 2001

Current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Property and equipment, net ....................

Other assets.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Noncurrent liabilities . . . . . . . . . . . . . . . . . . . . . . . . . Minority interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . Company obligated mandatorily redeemable and other

preferred securities . . . . . . . . . . . . . . . . . . . . . . . . . Shareholders’ investment . . . . . . . . . . . . . . . . . . . . . . .

Goodwill and other intangibles . . . . . . . . . . . . . . . . . .

WoddCom Group

$ 8,179 36,792 40,818 6,112

$91,901

$ 5,915 24,533 3,742

101

1,993 55,617

Total liabilities and shareholders’ investment . . . . . . . $91,901

MCI Group Eliminations(1) WorldCom

$ 1,926 2,017 9,719

227 $13,889

$ 4,195 5,505 1,876

$ (900)

- (976)

$(1,876)

$ (900) -

(976)

2,313 -

$13,889 $(1,876)

$ 9,205 38,809 50,537 5,363

$103,9 14

$ 9,210 30,038 4,642

101

1,993 57,930

$103,914

(1) Represents the elimination of intergroup receivables and payables associated with other intergroup allocations between the WorldCom group and the MCI group. The WorldCom group had a net receivable from the MCI group (and the MCI group had a corresponding net payable to the WorldCom group) of $1.9 billion, of which $900 million was classified as current with the remainder classified as long-term.

F-45


DECEMBER 31,2001


CONSOLIDATING STATEMENT OF OPERATIONS (In millions)

Year Ended December 31,2001 WorldCom MCI

Group Group Eliminations WorldCom ~~

Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating expenses:

Line costs: Attributed costs (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . Intergroup allocated expenses (2) . . . . . . . . . . . . . . . . . . .

Attributed costs (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . Shared corporate services (3) . . . . . . . . . . . . . . . . . . . . . .


Other intergroup allocated expenses (4) . . . . . . . . . . . . . . . Depreciation and amortization:

Attributed costs (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . Intergroup allocated expenses (5) . . . . . . . . . . . . . . . . . . .

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Miscellaneous income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Income tax expense (benefit) . . . . . . . . . . . . . . . . . . . . . . . . .

Minority interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income (loss) before distributions on mandatorily

redeemable preferred securities . . . . . . . . . . . . . . . . . . . . . . Distributions on mandatorily redeemable preferred securities and

Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Income (loss) before income taxes and minority interests . . . . . .

Income (loss) before minority interests . . . . . . . . . . . . . . . . . .

other preferred dividend requirements . . . . . . . . . . . . . . . . .

$21,348

8,019 101

4,052 2,006

4,841 (720)

18,299 3,049

(1,029) 412

2,432 943

1,489 35

1,524

117 $ 1,407

$13,831

6,720 360

3,438 1,550

360

1,039

13,366 465

(101)

(504) -

$ - $35,179

821 ~

14,739 -

11,046 - -

5,880

31,665 3,514

412

-

(1,533)

2,393 927

1,466 35

1,501

117 $ 1,384

(1) Attributed costs represent costs directly incurred by or attributed to the WorldCom group and the MCI group and do not include any intergroup allocations.

(2) The WorldCom group was allocated $101 million for its usage of our business voice switches, which have been attributed to the MCI group, and the MCI group was allocated $360 million for its usage of our fiber optic systems, which have been attributed to the WorldCom group.


(4) The MCI group was allocated $332 million of costs related to its use of buildings, furniture and f i u r e s and $28 million for use of the MCI tradenames, which assets have been attributed to the WorldCom group.

(5) A credit of $692 million and $101 million to depreciation expense has been recorded by the WorldCom group and the MCI group, respectively, to reflect the allocation of a portion of the applicable costs for the use by the WorldCom group of the business voice switches attributed to the MCI group, and the proportionate use by the MCI group of the fiber optic systems and buildings, furniture and fixtures attributed to the WorldCom group. Additionally, a credit of $28 million to amortization expense has been recorded by the WorldCom group to reflect the charge to the MCI group for use of the MCI tradenames.

F-46


DECEMBER 31,2001


CONSOLIDATING STATEMENT OF CASH FLOWS (In millions)

Year Ended December 31. 2001 MCI

Group __ Eliminations WoddCnm WnddCom

Group

Cash flows from operating activities: Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Adjustments to reconcile net income (loss) to net cash

provided by operating activities .................... Net cash provided by operating activities . . . . . . . . . . .

Cash flows from investing activities: Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Acquisitions and related costs. ...................... All other investing activities, net. . . . . . . . . . . . . . . . . . . . .

Cash flows from financing activities: Net cash used in investing activities . . . . . . . . . . . . . . .

Principal borrowings (repayments) on debt, net . . . . . . . . . . Attributed stock activity of WorldCom, Inc. . . . . . . . . . . . . . Intergroup advances, net . . . . . . . . . . . . . . . . . . . . . . . . . . All other financing activities, net ....................

Net cash provided by (used in) financing activities Effect of exchange rate changes on cash . . . . . . . . . . . . . . . Net increase (decrease) in cash and cash equivalents . . . . . . Cash and cash equivalents beginning of period . . . . . . . . . .

. . . .

Deconsolidation of Embratel . . . . . . . . . . . . . . . . . . . . . . . Cash and cash equivalents end of period. . . . . . . . . . . . . . .

$ 1,524 $ - $ 1,501

6,493 5,081 1,412 1,389

~

~

6,605 7,994

3,526 124 (15)

(555)

3,031 124 -

(626) 2,529

38 3,080

38

(34) 41

871 761

(216)

905 720

$ 1,409 (216)

$ 1,416

F-47

WORLDCOM, INC.

Descnotions

Allowance for doubtful accounts (in millions):

SCHEDULE I1 VALUATION AND QUALIFYING ACCOUNTS

Balance at Charged To Additions Deductions Beginning Deconsolidation Costs and From Purchase and Accounts Balance at of Period of Embratel Expenses 'hnsactions Written Off End of Period -~

Accounts Receivable 2001 . . . . . . . . . . . . . . . . . . . $1,532 $282 $1,313 $194 $1,671 $1,086

. . . . . . . . . . . . . . . . . . 1,455 1,532 2000. 1,122 - 1,865 - . . . . . . . . . . . . . . . . . 95 1 19 768 1,122 1999.. 920 -

F-48

INDEX TO FINANCIAL STATEMENTS

Page ~

WorldCom Group (an integrated business of WorldCom, Inc.)

Report of independent public accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-50

Combined balance sheets as of December 31, 2000 and 2001. ........................ F-51

Combined statements of operations for the three years ended December 31, 2001 . . . . . . . . . F-52

Combined statements of allocated net worth for the three years ended December 31, 2001 . . . F-53

Combined statements of cash flows for the three years ended December 31, 2001. . . . . . . . . . F-54

Notes to combined financial statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-55

You should understand the following when reading the combined financial statements of the

WorldCom has presented the combined financial statements of the WorldCom group at

WorldCom group, which is an integrated business of WorldCom, Inc.:

substantially the same level of detail as the consolidated financial statements of WorldCom. WorldCom believes that investors require detailed financial information for the WorldCom group to properly evaluate the market potential of WorldCom group stock;

voice businesses and is not a separate legal entity;

ownership interest in the WorldCom group or any company in the WorldCom group or a claim on any of the assets attributed to the WorldCom group;

the attribution of a portion of WorldCom’s assets and liabilities to the WorldCom group does not affect WorldCom’s ownership of these assets or responsibility for these liabilities and does not affect the rights of any creditor of WorldCom; and

the assets attributed to the WorldCom group could be subject to the liabilities attributed to the MCI group.

the WorldCom group is a collection of WorldCom’s data, Internet, international and commercial

the holders of the WorldCom group stock are shareholders of WorldCom and do not have an

F-49

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Shareholders of WorldCom, Inc.:

We have audited the accompanying combined balance sheets of the WorldCom group (an integrated business of WorldCom, Inc.) (as described in Note 1) as of December 31, 2000 and 2001, and the related combined statements of operations, allocated net worth and cash flows for each of the years in the three-year period ended December 31, 2001. These financial statements are the responsibility of WorldCom, Inc.’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the WorldCom group combined financial statements referred to above present fairly, in all material respects, the combined financial position of the WorldCom group as of December 31, 2000 and 2001, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States.

As discussed in Note 1 to the combined financial statements, effective January 1, 2000, the WorldCom group changed its method of accounting for certain activation and installation fee revenues and expenses.

The WorldCom group is a fully integrated business of WorldCom, Inc. Accordingly, as described in Note 1, the WorldCom group’s combined financial statements have been derived from the consolidated financial statements and accounting records of WorldCom, Inc. and, therefore, reflect certain assumptions and allocations. As more fully discussed in Note 1, the combined financial statements of the WorldCom group should be read in conjunction with the audited consolidated statements of WorldCom, Inc.

ARTHUR ANDERSEN LLP

Jackson, Mississippi March 7, 2002

F-50

WORLDCOM GROUP (an integrated business of WorldCom, Inc.) COMBINED BALANCE SHEETS

(In Millions)

December 31, 2000 2001 ~ _ _ _

ASSETS Current assets:

Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accounts receivable, net of allowance for bad debts of $1,018 in 2000 and $693

in 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other current assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Transmission equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Receivable from MCI group, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Property and equipment:

Communications equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Furniture, furtures and other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Construction in progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Goodwill and other intangible assets Long-term receivable from MCI group, net

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

LIABILITIES AND SHAREHOLDERS’ INVESTMENT Current liabilities:

Short-term debt and current maturities of long-term debt. . . . . . . . . . . . . . . . . . Accrued interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accounts payable and accrued line costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Long-termdebt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred tax liability ............................................ Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Long-term liabilities, less current portion:

Total long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commitments and contingencies Minority interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Company obligated mandatorily redeemable and other preferred securities. . . . . . . Allocated networth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 720 $ 1,409

4,980 3,734 131 241

1.612 1.895 649 900 _ _ _ _ _

8,092 8,179 ~~

19,883 23,369 5,873 5,434 8,666 10,583 6,727 5,576

41,149 44,962 (5,972) (8,170) 35,177 36,792 36,685 40,818

976 976 4,963 5,136

$85,893 $91,901

_ _ _ ~

~ _ _ _

_ _ _ _ _ _ _ _ _ _

_ _ _ _ _ _ _ _ _

~ _ _ _ ~ _ _ _

$ 7,200 $ 172 338 507

3,584 2,751 3,091 2,485

14,213 5,915 _ _ _ _ _ _

~~

11,696 24,533 2,683 3,196

965 546 15,344 28,275

~~

~~

2,592 101 798 1,993

52,946 55,617 $85,893 $91,901 _ _ _ _ _ _ _ _ _ _

~~ _ _ _ ~

The accompanying notes are an integral part of these combined statements.

F-5 1

WORLDCOM GROUP (an integrated business of WorldCom, Inc.) COMBINED STATEMENTS OF OPERATIONS

(In Millions)

For the Years Ended December 31. 1999 2000 _ _ _ _ _ _

Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $19,736 $22,755 Operating expenses:

~~

Line costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,905 8,745 Selling, general and administrative ........................ 4,195 5,689 Depreciation and amortization ........................... 3,013 3,280

- .... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (8) ~~

Other charges.

Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,105 17,714 ~~

Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,631 5,041 Other income (expense):

Interest expense . . . . . Miscellaneous . . . . . . .

. . . . . . . . . . . . . . . . . . . . .

..................... __ (460) (458) 237 385

~~

Income before income taxes, minority interests and cumulative effect of accounting change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,408 4,968

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,856 1,990 Provision for income taxes Income before minority interests and cumulative effect of accounting

change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,552 2,978

~~

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (186) (305) Income before cumulative effect of accounting change . . . . . . . . . . . 2,366 2,673

(75)

~~

Minority interests

Cumulative effect of accounting change (net of income tax of $43 in . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -

~~

2000) Net income before distributions on mandatorily redeemable

Distributions on mandatorily redeemable preferred securities and 72 65

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,294 $ 2,533

preferred securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,366 2,598

..................... _ _ _ _ _ _ _ _ other preferred dividend requirements

~~ ~~

2001

$21,348

8,120 6,058 4,121

18,299 3,049

2,432 943

1,489 35

1,524

-

1,524

117 $ 1,407


F-52

WORLDCOM GROUP (an integrated business of WorldCom. Inc.) COMBINED STATEMENTS OF ALLOCATED NET WORTH

For the Three Years Ended December 31. 2001 (In Millions)

Balances. December 31. 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . Funds attributed from WorldCom. Inc . . . . . . . . . . . . . . . . . . . . . Advances from MCI group. net . . . . . . . . . . . . . . . . . . . . . . . . . Other comprehensive income (net of taxes and reclassifications): Net income before distributions on mandatorily redeemable

preferred securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Distributions on mandatorily redeemable preferred securities and

other preferred dividend requirements . . . . . . . . . . . . . . . . . . Net change in unrealized holding gain on marketable equity

securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign currency adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total comprehensive income . . . . . . . . . . . . . . . . . . . Balances. December 31. 1999 . . . . . . . . . . . . . . . . . . . . . . . . . . Funds attributed from WorldCom. Inc . . . . . . . . . . . . . . . . . . . . . Advances from MCI group. net . . . . . . . . . . . . . . . . . . . . . . . . . Other comprehensive income (net of taxes and reclassifications): Net income before distributions on mandatorily redeemable

preferred securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Distributions on mandatorily redeemable preferred securities and

other preferred dividend requirements . . . . . . . . . . . . . . . . . . Net change in unrealized holding gain on marketable equity

securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign currency adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total comprehensive income . . . . . . . . . . . . . . . . . . . Balances. December 31. 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . Deconsolidation of Embratel . . . . . . . . . . . . . . . . . . . . . . . . . . Funds attributed from WorldCom, Inc . . . . . . . . . . . . . . . . . . . . . Advances to MCI group. net . . . . . . . . . . . . . . . . . . . . . . . . . . Other comprehensive income (net of taxes and reclassifications): Net income before distributions on mandatorily redeemable

Distributions on mandatorily redeemable preferred securities and

Derivative financial instruments:

preferred securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

other preferred dividend requirements . . . . . . . . . . . . . . . . . .

Cumulative effect of adoption of SFAS 133 as of January 1, 2001 Reclassification of derivative financial instruments to current

earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Change in fair value of derivative financial instruments . . . . . . .

Net change in unrealized holding gain (loss) on marketable equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Foreign currency adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . Total comprehensive income . . . . . . . . . . . . . . . . . . .

Balances. December 31, 2001 . . . . . . . . . . . . . . . . . . . . . . . . . .

Attributed Capital

$42. 197 1. 935 2. 097

2. 366

(72)

- -

Unrealized Holding

Gain (Loss)

$ 122 . .

.

.

453 .

Foreign Currency

bnslation Adjustment

$ (28) . .

.

.

. (332)

48. 523 770

1. 592

2. 598

(65)

- -

575 . .

.

.

(230) .

(360) . .

.

.

. (457)

53. 418

1. 422 (2)

(15)

1. 524

(117)

-

- .

.

.

345 . . .

.

.

28

(110)

(396)

82

.

(817) 335 . .

.

.

.

.

.

.

(80)

$56. 230

Allocated Net Worth

$42. 291 1. 935 2. 097

2. 366

(72)

(332) 453

2. 415 48. 738

770 1. 592

2. 598

(65)

(230) (457) 1. 846

52. 946 333

1. 422 (15)

1. 524

(117)

28

(110)

(396) (80)

82

931 $55. 617

The accompanying notes are an integral part of these combined statements .

F-53

WORLDCOM GROUP (an integrated business of WorldCom. Inc.) COMBINED STATEMENTS OF CASH FLOWS

(In Millions)

For the Years Ended December 31. 1999 2000 2001 _ _ _ _ _ _ _ .

Cash flows from operating activities: Net income before distributions on mandatorily redeemable preferred securities . Adjustments to reconcile net income before distributions on mandatorily

redeemable preferred securities to net cash provided by operating activities: Cumulative effect of accounting change . . . . . . . . . . . . . . . . . . . . . . . . . Minority interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . In-process research and development and other charges . . . . . . . . . . . . . . Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provision for deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . Change in assets and liabilities. net of effect of business combinations:

Accounts receivable. net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Receivable from MCI group. net . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accounts payable and other current liabilities . . . . . . . . . . . . . . . . . . . Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

All other operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash flows from investing activities:

Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Acquisitions and related costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Increase in intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Decrease in other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . All other investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash flows from financing activities:

Principal borrowings (repayments) on debt. net . . . . . . . . . . . . . . . . . . . . . Attributed stock activity of WorldCom. Inc . . . . . . . . . . . . . . . . . . . . . . . . . Distributions on mandatorily redeemable and other preferred securities and

dividends paid on other equity securities . . . . . . . . . . . . . . . . . . . . . . . . Redemptions of preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Advances (to) from MCI group. net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . All other financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Net cash provided by financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . Effect of exchange rate changes on cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . . . . Cash and cash equivalents at beginning of period . . . . . . . . . . . . . . . . . . . . . . Deconsolidation of Embratel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash and cash equivalents at end of period . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 2. 366 $ 2. 598 $ 1. 524

. 75 .

186 305 (35) . . 3, 280 4, 121 3. 013

2. 510 1. 410 1. 131

(8)

(611) (1. 300) 104 (649) (251) 624 (200)

(555) 746 119

7. 352 (414)

5. 330

‘104 . 107

6. 605

(72) . 2. 097 .

6. 377 585

(65) (190)

(84)

(19) (86)

1. 592

8. 215

806 -

$ 806 $ 720 $ 1. 409


F-54

WorldCom Group (an integrated business of WorldCom, Inc.) NOTES TO COMBINED FINANCIAL STATEMENTS

DECEMBER 31,2001

(1) The Company and Significant Accounting Policies-

Description of Business and Organization:

communications services to both U.S. and non-U.S. based businesses and consumers. We are a global communications company utilizing a strategy based on being able to provide service through our own facilities throughout the world instead of being restricted to a particular geographic location. We call this our “on-net” strategy. The on-net approach allows our customers to send data or voice communications across town, across the U.S., or to any of our networks in Europe or Asia, often without ever leaving our networks. The on-net approach provides our customers with superior reliability and low operating costs. Our core business is communications services, which includes voice, data, Internet and international services. We serve as a holding company for our subsidiaries’ operations. References herein to WorldCom, “we,” “our,” or “us” include WorldCom, Inc. and its subsidiaries, unless the context otherwise requires.

Organized in 1983, WorldCom, Inc., a Georgia corporation, provides a broad range of

Basis of Combination and Presentation:

On June 7, 2001, our shareholders approved a recapitalization involving the creation of two

WorldCom group stock, which is intended to reflect the performance of our data, Internet,

separately traded tracking stocks:

international and commercial voice businesses and is quoted on The Nasdaq National Market under the trading symbol “WCOM”, and

MCI group stock, which is intended to reflect the performance of our consumer, small business, wholesale long distance voice and data, wireless messaging and dial-up Internet access businesses and is quoted on The Nasdaq National Market under the trading symbol “MCIT”.

In connection with the recapitalization, we amended our articles of incorporation to replace our existing common stock with two new series of common stock that are intended to reflect, or track, the performance of the businesses attributed to the WorldCom group and the MCI group. Effective with the recapitalization on June 7, 2001, each share of our existing common stock was changed into one share of WorldCom group stock and ?Lis of a share of MCI group stock.

investors based upon the financial performance of a distinct business unit of the company, sometimes referred to as the targeted business. These targeted businesses are collections of businesses that we have grouped together in order for us to issue WorldCom group stock and MCI group stock. The ownership of the targeted business does not change, and while each of the classes of stock trade separately, all shareholders are common shareholders of a single company, WorldCom, and are subject to all risks of an investment in WorldCom as a whole.

stock. A cash dividend of $0.60 per share of MCI group stock, or approximately $70 million in the aggregate, was paid on October 15, 2001 to shareholders of record as of the close of business on September 28, 2001. Dividends of $0.60 per share of MCI group stock were also declared in the third and fourth quarters of 2001, which have been or will be paid in 2002.

The MCI group was initially allocated notional debt of $6 billion and our remaining debt was allocated on a notional basis to the WorldCom group. We intend, for so long as the WorldCom group

A tracking stock is a separate class of a company’s common stock intended to provide a return to

During the second quarter of 2001, we declared the initial quarterly dividend for the MCI group

F-55

WorldCom Group (an integrated business of WorldCom, Inc.) NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)

DECEMBER 31,2001

(1) The Company and Significant Accounting Policies- (Continued)

stock and the MCI group stock remains outstanding, to include in our filings under the Securities Exchange Act of 1934, as amended, the combined financial statements of each of the WorldCom group and the MCI group. These combined financial statements will be prepared in accordance with accounting principles generally accepted in the United States, and in the case of annual financial statements, will be audited. These combined financial statements are not legally required under current law or SEC regulations.

Voting rights of the holders of the WorldCom group stock and the MCI group stock are prorated based on the relative market values of WorldCom group stock and MCI group stock. We will conduct shareholder meetings that encompass all holders of voting stock. The WorldCom group and the MCI group shareholders will vote together as a single class on all matters brought to a vote of shareholders, including the election of our directors.

Our board of directors may at any time convert each outstanding share of MCI group stock into shares of WorldCom group stock at 110% of the relative trading value of MCI group stock for the 20 days prior to the announcement of the conversion. No premium will be paid on a conversion that occurs after June 7, 2004.

If all or substantially all of the WorldCom group or MCI group assets are sold, either: (i) the relevant shareholders will receive a distribution equal to the fair value of the net proceeds of the sale, either by special dividend or by redemption of shares; or (ii) each outstanding share of MCI group stock will be converted into shares of WorldCom group stock at 110% or 100% of the relative trading value of MCI group stock for a 10 trading day period following the sale.

Intergroup Allocation Policies:

'hacking Stock Policy Statement

Our board of directors has fiduciary duties to all shareholders of WorldCom, and no independent fiduciary duties to the holders of WorldCom group stock and MCI group stock. Our board of directors has adopted a policy statement regarding the WorldCom group and the MCI group matters. Our board of directors or any special committee appointed by our board of directors, may, without shareholder approval, change the policies set forth in our policy statement. Our board of directors or any special committee appointed by our board of directors also may, without shareholder approval, adopt additional policies or make exceptions with respect to the application of the policies described in our policy statement in connection with particular facts and circumstances, all as they may determine to be in the best interests of WorldCom. The material provisions of the policy statement are as follows:

The policy statement provides that all material matters as to which the holders of WorldCom group stock and MCI group stock may have potentially divergent interests will be resolved in a manner that our board of directors or any special committee appointed by our board of directors determines to be in the best interests of WorldCom as a whole, after giving due consideration to the potentially divergent interests and all other interests of the holders of the separate series of common stock of WorldCom that our board of directors or any special committee, as the case may be, deems relevant. The policy statement provides that we will manage the businesses in the WorldCom group and the MCI group in a manner intended to maximize the operations, assets and values of both groups, and

Generul Policy.

F-56

WorldCom Group (an integrated business of WorldCom, Inc.)

NOTES TO COMBINED FINANCIAL STATEMENTS (Continued) DECEMBER 31,2001


with complementary deployment of personnel, capital and facilities, consistent with their respective business objectives.

Under this policy statement, all material transactions which are determined by our board of directors to be in the ordinary course of business between the WorldCom group and the MCI group, except for those described in the paragraphs below, are intended to be on terms consistent with terms that would be applicable to arm’s-length dealings with unrelated third parties.

retirement of debt, and the issuance and repurchase of common and preferred stock will continue to be made by WorldCom management on behalf of the groups. Under this centralized cash management system, the MCI group will generally not be allocated any cash balances.

Cash Management. Decisions regarding the investment of surplus cash, the issuance and

Corporate Allocations

group based upon identification of such services specifically benefiting each group. Such corporate allocations may change at our discretion and do not require shareholder approval. Management believes that the allocation methodologies applied are reasonable and these methods have been consistently applied for all periods presented. However, it is not practical to determine whether the allocated amounts represent amounts that would have been incurred on a stand alone basis. Explanations of the composition and the method of allocation for such items are described below.

Corporate allocations have been attributed and/or allocated to the WorldCom group or the MCI

Shared Corporate Services. We have directly charged specifically identifiable costs to the WorldCom group and the MCI group. Where determinations based on specific usage alone were impracticable, we used other allocation methods that we believe are fair, including methods based on factors such as the number of employees and total line costs or revenues generated by each group. For the years ended December 31, 1999, 2000 and 2001, the WorldCom group was allocated $1.6 billion, $2.0 billion and $2.0 billion of these costs, respectively.

Commercial Znter-Group Transactions. The MCI group is allocated a proportion, based on usage, of our fiber optic system costs for use of the fiber optic systems, which are attributed to the WorldCom group and the WorldCom group is allocated a corresponding decrease to depreciation expense which totaled $189 million, $373 million and $360 million for the years ended December 31, 1999, 2000 and 2001, respectively. In addition, the WorldCom group is allocated a proportion, based on usage, of our switching costs for use of the business voice switched services, which are attributed to the MCI group. For the years ended December 31, 1999, 2000 and 2001, switching costs allocated to the WorldCom group were $64 million, $87 million and $101 million, respectively. Additionally, the MCI group is allocated a proportionate share of costs associated with buildings, furniture and fixtures attributed to the WorldCom group, and is also allocated costs for use of the MCI tradenames as discussed below. The WorldCom group is allocated a corresponding decrease to depreciation and amortization expense. For the years ended December 31, 1999, 2000 and 2001, these allocated costs totaled $331 million, $254 million and $360 million, respectively.

are intended, to the extent practicable, to be on terms consistent with terms that would be applicable to All other material commercial transactions in the ordinary course of business between the groups

F-57


DECEMBER 31,2001


arm’s-length dealings with unrelated third parties and will be subject to the review and approval of our board of directors or any special committee. Neither group is under any obligation to use services provided by the other group, and each group may use services provided by a competitor of the other group if our board of directors or any special committee determines it is in the best interests of WorldCom as a whole.

Allocation of Zntangible Assets. Intangible assets consist of the excess consideration paid over the fair value of net tangible assets acquired by us in business combinations accounted for under the purchase method and include goodwill, channel rights, developed technology and tradenames. These assets have been attributed to the respective groups based on specific identification and where acquired companies have been divided between the WorldCom group and the MCI group, the intangible assets have been attributed based on the respective fair values at the date of purchase of the related operations attributed to each group. Management believes that this method of allocation is equitable and provides a reasonable estimate of the intangible assets attributable to the WorldCom group and the MCI group.

All tradenames, including the MCI tradename and the other related MCI tradenames, have been attributed to the WorldCom group. The MCI group will be allocated an expense and the WorldCom group will be allocated a corresponding decrease in depreciation and amortization expense for the use of the MCI tradenames for the next four years based on the following fee schedule:

2002: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $30.0 million 2003: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $35.0 million 2004: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $40.0 million 2005: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $45.0 million

Any renewal or termination of use of the MCI tradename by the MCI group will be subject to the general policy that our board of directors will act in the best interests of WorldCom. For each of the years ended December 31, 1999, 2000 and 2001, depreciation and amortization expense associated with the MCI tradenames allocated to the WorldCom group was decreased by $27.5 million per annum for use of the MCI tradenames by the MCI group.

Financing Arrangements. As of January 1, 1999, $6.0 billion of our outstanding debt was notionally allocated to the MCI group and the remainder of our debt was notionally allocated to the WorldCom group. Our debt was allocated between the WorldCom group and the MCI group based upon a number of factors including estimated future cash flows and the ability to pay debt service and dividends of each of the groups. In addition, management considered certain measures of creditworthiness, such as coverage ratios and various tests of liquidity, in the allocation process. Our management believes that the initial allocation was equitable and supportable by both the WorldCom group and the MCI group. The debt allocated to the MCI group bears interest at a rate indicative of the rate at which the MCI group would borrow from third parties if it was a wholly owned subsidiary of WorldCom but did not have the benefit of any guarantee by WorldCom. Interest rates are calculated on a quarterly basis. Debt allocated to the MCI group bears an interest rate equal to the weighted-average interest rate, excluding capitalized interest, of WorldCom debt plus 1% percent. Interest allocated to the WorldCom group reflects the difference between our actual interest expense and the interest expense charged to the MCI

F-58


DECEMBER 31,2001


group. Subsequent to the recapitalization, each group’s allocated debt increases or decreases by the amount of any net cash generated by, or required to fund, the group’s operating activities, investing activities, dividend payments, share repurchases and other financing activities.

As of December 31, 2001, our receivables purchase program consisted of a $3.7 billion pool of receivables in which the purchaser owned an undivided interest, including the $2.0 billion sold, of which $2.8 billion and $1.7 billion relate to the WorldCom group, respectively. The receivables sold were assigned based on specific identification where practical, or allocated based on total revenues. Our management believes that this method of allocation is equitable and provides a reasonable estimate of the receivables attributable to the groups.

Embratel Deconsolidation:

During the second quarter of 2001, we reached a long-term strategic decision to restructure our investment in Embratel Participaqjes S.A., or Embratel. The restructuring included the resignation of certain Embratel board of directors seats, the irrevocable obligation to vote a portion of our common shares in a specified manner and the transfer of certain economic rights associated with such shares to an unrelated third party. Based on these actions, the accounting principles generally accepted in the United States prohibit the continued consolidation of Embratel’s results. Accordingly, we have deconsolidated Embratel’s results effective January 1, 2001.

$992 million which is included in the other assets in the accompanying combined financial statements. Our equity in Embratel’s loss for 2001 is included in miscellaneous income/(expense) in the accompanying combined financial statements. Our investment in Embratel has been allocated to the WorldCom group.

As of December 31, 2001, our carrying value for our 19.3% ownership interest in Embratel was

Fair Value of Financial Instruments:

See Note 1 to our consolidated financial statements for additional fair value descriptions.

Cash and Cash Equivalents:

less as cash and cash equivalents. We consider cash in banks and short-term investments with original maturities of three months or

Property and Equipment:

purposes using the straight-line method over the following estimated useful lives: Property and equipment are stated at cost. Depreciation is provided for financial reporting

Transmission equipment (including conduit) . . . . . . . . . . . . . . . . . . . Communications equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Furniture, fixtures, buildings and other .......................

4 to 40 years 5 to 10 years 4 to 39 years

We evaluate the recoverability of property and equipment when events and circumstances indicate that such assets might be impaired. We determine impairment by comparing the undiscounted future

F-59


DECEMBER 31,2001


cash flows estimated to be generated by these assets to their respective carrying amounts. In the event an impairment exists on property and equipment attributed to the WorldCom group, a loss will be recognized by the WorldCom group based on the amount by which the carrying value exceeds the fair value of the asset. If quoted market prices for an asset are not available, fair market value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved. Losses on property and equipment to be disposed of are determined in a similar manner, except that fair market values are reduced for the cost to dispose.

The cost and related reserves of assets sold or retired are removed from the accounts, and any resulting gain or loss is reflected in results of operations.

We construct certain of our own transmission systems and related facilities. Internal costs directly related to the construction of such facilities, including interest and salaries of certain employees, are capitalized. Such internal costs were $625 million ($339 million in interest), $842 million ($495 million in interest) and $858 million ($498 million in interest) in 1999, 2000 and 2001, respectively, and have been allocated to the WorldCom group.

Maintenance and repairs are expensed as incurred. Replacements and betterments are capitalized.

Goodwill and Other Intangible Assets:

and 2001 are summarized below (in millions): The major classes of intangible assets attributed to the WorldCom group as of December 31, 2000

Amortization Period 2000 2001 _ _ _ _ ~ Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 to 40 years $35,596 $40,551

......................... 1,100 1,112 Tradenames 40 years Developed technology . . . . . . . . . . . . . . . . . . 5 to 10 years 1,590 1,590 Other intangibles ..................... 5 to 10 years 2,665 3,414

40,951 46,667 . . . . . . . . . . . (4,266) (5,849)

. . . . $36,685 $40,818

~~

~~

Less: accumulated amortization Goodwill and other intangible assets, net

~~ ~~

Intangible assets are amortized using the straight-line method for the periods noted above.

Goodwill is recognized for the excess of the purchase price of the various business combinations over the value of the identifiable net tangible and intangible assets acquired. Realization of acquisition- related intangibles, including goodwill, is periodically assessed by our management based on the current and expected future profitability and cash flows of acquired companies and their contribution to the overall operations of the WorldCom group.

Also included in other intangibles are costs incurred to develop software for internal use. Such costs were $354 million, $765 million and $364 million for the years ended December 31, 1999,2000 and 2001, respectively.

F-60


DECEMBER 31,2001


Investments in Marketable Equity Securities:

Investments in marketable equity securities are classified as available-for-sale securities and reported at fair value. Unrealized holding gains and losses, net of taxes, are reflected as a component of allocated net worth in the accompanying combined financial statements. See Note 3 to our consolidated financial statements for additional investment disclosures.

Foreign Currency lkanslation:

balance sheet date. Translation adjustments are recorded as a separate component of allocated net worth. All revenue and expense accounts are translated at a weighted-average of exchange rates in effect during the period. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred. The accompanying combined statements of operations include foreign currency transaction losses, after elimination of minority interests, of $36 million and $38 million for the years ended December 31, 1999 and 2000, respectively, and foreign currency transaction gains of $9 million for the year ended December 31, 2001.

Assets and liabilities recorded in foreign currencies are translated at the exchange rate as of the

Recognition of Revenues:

usage. Service activation and installation fees are amortized over the average customer contract life. The WorldCom group records revenues for telecommunications services at the time of customer

Accounting for International Long Distance 'Ikaffic and Other:

The WorldCom group enters into operating agreements with telecommunications carriers in foreign countries under which international long distance traffic is both delivered and received. The terms of most switched voice operating agreements, as well as established FCC policy, require that inbound switched voice traffic from the foreign carrier to the United States be routed to United States international carriers, like the WorldCom group, in proportion to the percentage of United States outbound traffic routed by that United States international carrier to the foreign carrier. Mutually exchanged traffic between the WorldCom group and foreign carriers is settled in cash through a formal settlement policy that generally extends over a six-month period at an agreed upon settlement rate. International settlements are treated as an offset to line costs. This reflects the way in which the business is operated because the WorldCom group actually settles in cash through a formal net settlement process that is inherent in the operating agreements with foreign carriers.

behalf of other carriers' customers and is determined contractually based on fmed rate per minute charges to those carriers. As such, we have determined that it is more appropriate to reflect this reimbursement of our cost as an offset to cost of sales rather than reporting this reimbursement on a gross basis as revenues. During the years ended December 31, 1999, 2000 and 2001, reciprocal compensation recorded by the WorldCom group was $395 million, $400 million and $248 million, respectively.

Reciprocal compensation represents a reimbursement of costs for call termination performed on

F-61


DECEMBER 31,2001

(1) The Company and Significant Accounting Policies+Continued)

Derivative Financial Instruments:

Effective January 1, 2001, we adopted SFAS No. 133. This statement establishes accounting and reporting standards requiring that derivative instruments (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at fair value. As of January 1, 2001, our exposure to derivative financial instruments primarily consisted of option collar transactions designated as cash flow hedges of anticipated sales of an equity investment, which we maintain to minimize the impact of adverse changes in the market price of the related equity investment. The initial adoption of SFAS No. 133 provided a net transition gain from our designated cash flow hedges resulting in an increase in other comprehensive income of approximately $28 million. During 2001, shares of the hedged equity investment were sold and we reclassified respective hedging gains of $1 10 million from accumulated comprehensive income to miscellaneous income. As of December 31, 2001, we maintain no derivative financial instruments. No amounts were reclassified to earnings resulting from any ineffective portion of the designated derivative hedges or from the discontinuance of designation of any cash flow hedges. All of our derivative instrument activity was attributed to the WorldCom group.

Cumulative Effect of Accounting Change:

certain activation and installation fee revenues to be amortized over the average life of the related service rather than be recognized immediately. Costs directly related to these revenues may also be deferred and amortized over the customer contract life. As required by SAB 101, the WorldCom group retroactively adopted this accounting effective January 1, 2000, which resulted in a one-time expense of $75 million, net of income tax benefit of $43 million. The pro forma effect of adopting SAB 101 on periods prior to January 1, 2000 was not material to the WorldCom group’s financial position or results of operations.

During the fourth quarter of 2000, the WorldCom group implemented SAB 101, which requires

Income Taxes:

The federal and state income tax liabilities incurred by WorldCom and which are determined on a consolidated, combined, or unitary basis are allocated between the WorldCom group and the MCI group in accordance with our policy statement. The income tax expense or benefit for each group and the balance sheet allocation of the expense is based on a comparison of our tax expense with the hypothetical tax expense or benefit of the MCI group. The tax expense or benefit allocable to the MCI group is the amount that the MCI group would have incurred if it had filed tax returns as a separate taxpayer and the tax expense allocable to the WorldCom group is the excess, if any, of our tax expense over the tax expense or benefit allocable to the MCI group. Tax benefits that cannot be used by a group generating those benefits but can be used on a consolidated basis are credited to the group that generated those benefits. Had the WorldCom group and the MCI group filed separate tax returns, the provision for income taxes and net income for each group would not have significantly differed from the amounts reported on the group’s combined statements of operations for the years ended December 31, 1999, 2000 and 2001. However, the amounts of current and deferred taxes and taxes payable or refundable attributed to each group on the historical financial statements may differ from those that

F-62


DECEMBER 31,2001

(1) The Company and Significant Accounting Policies-iContinued)

would have been allocated had the WorldCom group or the MCI group filed separate income tax returns.

Deferred tax assets and liabilities are based on temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and their respective tax bases, and the impact of available net operating loss, or NOL, carryforwards. Valuation allowances have been recorded to reduce the deferred tax asset to the amount more likely than not to be realized.

Earnings Per Share:

Our consolidated financial statements present basic and diluted earnings (loss) per share for WorldCom group stock and MCI group stock using the two-class method. The two-class method is an earnings formula that determines the attributed earnings (loss) per share for WorldCom group stock and MCI group stock according to participation rights in undistributed earnings. The combined financial statements of the WorldCom group do not present earnings per share because WorldCom group stock is a series of our common stock, and the WorldCom group is not a legal entity with a capital structure.

For purposes of our consolidated financial statements, basic earnings per share attributed to WorldCom group stock is computed by dividing attributed net income for the period by the number of weighted-average shares of WorldCom group stock then outstanding. Diluted earnings per share attributed to WorldCom group stock is computed by dividing attributed net income for the period by the weighted-average number of shares of WorldCom group stock outstanding, including the dilutive effect of WorldCom group stock equivalents.

Concentration of Credit Risk

A portion of the WorldCom group’s revenues is derived from services provided to other telecommunications service providers. As a result, the WorldCom group has some concentration of credit risk among its customer base. The WorldCom group performs ongoing credit evaluations of its larger customers’ financial condition and, at times, requires collateral from its customers to support its receivables, usually in the form of assignment of its customers’ receivables to the WorldCom group in the event of nonpayment.

Recently Issued Accounting Standards:

“Goodwill and Other Intangible Assets.” SFAS No. 141 requires business combinations initiated after June 30, 2001, which includes the Intermedia merger, to be accounted for using the purchase method of accounting and broadens the criteria for recording intangible assets separate from goodwill. Recorded goodwill and intangibles will be evaluated against this new criteria and may result in certain intangibles being subsumed into goodwill, or alternatively, amounts initially recorded as goodwill may be separately identified and recognized apart from goodwill. Under the new rules, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests. The statement includes provisions for the identification of reporting units for purposes of assessing potential future impairments of goodwill. Upon adoption, we stopped amortizing

In June 2001, the FASB issued SFAS No. 141 “Business Combinations” and SFAS No. 142

F-63


DECEMBER 31,2001

(1) The Company and Significant Accounting Policies-(Continued)

intangible assets with indefinite useful lives, including goodwill and tradenames. Based on current levels of such assets, this will reduce amortization expense by approximately $1.0 billion annually at the WorldCom group. Additionally, we are conducting impairment reviews of all intangible assets with indefinite useful lives and we expect to complete this assessment no later than the second quarter of 2002, in accordance with the provisions of SFAS No. 142. Based on our preliminary analyses, we estimate that as a result of the adoption of SFAS No. 142 we will reduce goodwill by approximately $14 to $19 billion for the WorldCom group.

In June 2001, the FASB issued SFAS No. 143 “Asset Retirement Obligations,” which establishes new accounting and reporting standards for legal obligations associated with retiring assets. The fair value of a liability for an asset retirement obligation must be recorded in the period in which it is incurred, with the cost capitalized as part of the related long-lived assets and depreciated over the asset’s useful life. Changes in the liability resulting from the passage of time will be recognized as operating expenses. SFAS No. 143 must be adopted by 2003. We have not yet quantified the impact of adopting SFAS No. 143 on our consolidated results of operations or financial position.

In August 2001, the FASB issued SFAS No. 144 ‘Accounting for the Impairment or Disposal of Long-Lived Assets,” which supercedes both SFAS No. 121 “Accounting for the Impairment of Long- Lived Assets for Long-Lived Assets to be Disposed Of,” and the accounting and reporting provisions for the disposal of a segment of a business contained in APB Opinion No. 30, “Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions.” SFAS No. 144 establishes a single accounting model for long-lived assets to be disposed of by sale and broadens the presentation of discontinued operations. The provisions of SFAS No. 144 are effective beginning in 2002 and are not expected to have a material impact on our consolidated results of operations or financial position.

Use of Estimates:

The preparation of financial statements in conformity with accounting principles generally accepted in the United States, or G M , requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the period reported. Actual results could differ from those estimates. Estimates are used when accounting for allowance for doubtful accounts, revenue reserves, depreciation and amortization, taxes and contingencies.

(2) Business Combinations-

to those offered by us. These acquisitions have been accomplished through the purchase of the outstanding stock or assets of the acquired entity for cash, notes, shares of our common stock, or a combination thereof. The cash portion of acquisition costs has generally been financed through our bank credit facilities.

We have acquired other telecommunications companies offering similar or complementary services

On July 1, 2001, we acquired Intermedia Communications Inc. for approximately $5.8 billion, including assumed long-term debt, pursuant to the merger of a wholly owned subsidiary with and into Intermedia, with Intermedia continuing as the surviving corporation and as a subsidiary of WorldCom.

F-64


DECEMBER 31,2001

(2) Business Combinations-(Continued)

As a result of the Intermedia merger, we acquired a controlling interest in Digex, Incorporated, or Digex, a provider of managed Web and application hosting services. In connection with the Intermedia merger, stockholders of Intermedia received one share of WorldCom group stock (or 57.1 million WorldCom group shares in the aggregate) and 1/25th of a share of MCI group stock (or 2.3 million MCI group shares in the aggregate) for each share of Intermedia common stock they owned. Holders of Intermedia preferred stock, other than Intermedia’s 13.5% Series B Redeemable Exchangeable Preferred Stock due 2009, or Intermedia Series B Preferred Stock, received one share of a class or series of our preferred stock, with substantially identical terms, which were established upon consummation of the Intermedia merger. As a result of the merger with Intermedia, we own approximately 90% of the voting securities of Intermedia.

for shares of Intermedia common stock were converted into options exercisable for an aggregate of approximately 10 million shares of WorldCom group stock having the same terms and conditions as the Intermedia options, except that the exercise price and the number of shares issuable upon exercise were divided and multiplied, respectively, by 1.0319. The merger with Intermedia was accounted for as a purchase and was allocated to the WorldCom group.

date of acquisition. This resulted in an excess purchase price over net assets acquired of $5.1 billion of which $67 million was allocated to customer lists, which will be amortized over approximately four years on a straight-line basis. The remaining excess of $5.0 billion has been allocated to goodwill and tradename which are not subject to amortization and the goodwill is not expected to be deductible for tax purposes.

In connection with the Intermedia merger, the Antitrust Division of the Department of Justice required us to dispose of Intermedia’s Internet service provider business, which provided integrated Internet connectivity solutions, and effective December 1, 2001, we sold substantially all of the Internet related assets for approximately $12 million. In addition to this required divestiture, we also committed to a plan to sell Intermedia’s Advanced Building Network business, which provides centralized telecommunications services in multi-tenant commercial office buildings, and the systems integration business through which Intermedia sells, installs, operates and maintains business telephony customer premise equipment for its customers. We included the appraised fair values of these assets to be disposed of in our initial allocation of the Intermedia purchase price and also included accrued anticipated losses expected to be incurred through disposal date. Any difference between the actual results of operations and the amounts accrued will result in an adjustment of goodwill unless there is a difference resulting from a post-merger event. For the year ended December 31, 2001, operating losses for these assets to be disposed of were approximately $41 million, before corporate allocations. We anticipate that we will complete the planned disposals of the remaining identified businesses before the third quarter of 2002.

During 1999, 2000 and 2001, we recorded other liabilities of $582 million, $29 million and $254 million, respectively, related to estimated costs of unfavorable commitments of acquired entities, and other non-recurring costs arising from various acquisitions and mergers. At December 31, 1999, 2000 and 2001, other liabilities attributed to the WorldCom group related to these and previously recorded accruals totaled $1.6 billion, $832 million and $764 million, respectively.

Upon effectiveness of the merger with Intermedia, the then outstanding and unexercised options

The purchase price in the Intermedia merger was allocated based on appraised fair values at the

F-65


DECEMBER 31,2001

(3) Long-Term Debt-

Our outstanding debt as of December 31, 2000 and 2001 consists of the following (in millions):

Commercial paper and credit facilities .................... Floating rate notes due 2001 through 2002. . . . . . . . . . . . . . . . . 7.88% - 8.25% Notes Due 2003-2010. . . . . . . . . . . . . . . . . . . . . 7.38% Notes Due 2006-2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.13% - 6.95% Notes Due 2001-2028. .................... 7.13% - 7.75% Notes Due 2004-2027. .................... 8.88% Senior Notes Due 2006. ......................... 7.13% - 8.25% Senior Debentures Due 2023-2027 6.13% - 7.50% Senior Notes Due 2004-2012 6.50% - 8.25% Notes Due 2004-2031. .................... Intermedia 11.25%-12.25% Senior Discount Notes Due

2007-2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Intermedia 8.50%-9.50% Senior Notes Due 2007-2009 . . . . . . . . Capital lease obligations (maturing through 2017) . . . . . . . . . . . Embratel debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other debt (maturing through 2008) .....................

. . . . . . . . . . . . . . . . . . . . . . . . . .

Notional debt allocated to the MCI group . . . . . . . . . . . . . . . . . Notional debt allocated to the WorldCom group . . . . . . . . . . . . Short-term debt and current maturities of allocated WorldCom

group long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2000 2001 _ _ _ ~

$ 3,629 $ - 1,560 60 3,500 3,500 2,000 2,000 6,100 4,600 2,000 2,000

672 - 1,436 1,434 1,934 1,925 - 11,939

- 643 581

413 953 1,134 -

518 575 24,896 30,210

~~ (6,000) (5,505) 18,896 24,705

-

~~

(7,200) (172) ~ _ _ _ $11,696 $24,533 ~ _ _ _ _ ~ _ _ _ _ _ _

See Note 1 for a more detailed description of how we allocate debt to the groups and Note 4 of our consolidated financial statements for additional debt descriptions.

F-66


DECEMBER 31,2001

(4) Company Obligated Mandatorily Redeemable Preferred Securities of Subsidiaries and Other Redeemable Preferred Securities-

In connection with the Intermedia merger, we issued the following series of preferred stock, which are mandatorily redeemable:

Series D Junior Convertible preferred stock,

Series E Junior Convertible preferred stock,

Series F Junior Convertible preferred stock,

Series G Junior Convertible Participating

par value $0.01 per share . . . . . . . . . . . . .



preferred stock, par value $0.01 per share . .

Number of Preferred

Shares Authorized, Issued and

Outstanding

53,724

64,047

79,600

200,000

Liquidation Preference

Per Preferred Share

Annual Dividend

Per Preferred

Share

$2,500

$2,500

$2,500

$1,000

$175

$175

$175

$ 70

Associated Depository

Shares

Aggregate # of Shares Convertible at the Option

of Holder WoddCom MCI Group

Group Shares Shares

5,372,410 6,905,398 276,215

6,404,690 5,295,766 211,830

7,960,000 4,729,649 189,185

n/a 5,555,555 222,222

On August 20, 2001, the holder of our Series G preferred stock exercised its right to require us to redeem all of the outstanding Series G preferred stock at par plus accrued dividends, or approximately $200 million in the aggregate.

The Series D, E and F preferred stock are currently redeemable in whole or in part, at our option for cash plus accrued and unpaid dividends at rates commencing with 103%, declining to 100% in 2004 and thereafter for the Series D and E preferred stock and commencing with 104%, declining to 100% in 2005 and thereafter for the Series F preferred stock.

Dividends on the Series D, E and F preferred stock are payable in cash or shares of our common stock, at our election on each July 15, October 15, January 15 and April 15. To date, we have paid these dividends in cash and we expect to continue to pay cash dividends on our Series D, E and F preferred stock.

The Series D, E and F preferred shareholders are generally entitled to one-tenth of a vote per share of Series D, E or F preferred stock on all matters voting together with WorldCom common shareholders as a single class.

Redeemable Preferred Securities of Subsidiaries:

At the time of the Intermedia merger, Intermedia had outstanding Intermedia Series B Preferred Stock, and Digex had outstanding Series A Convertible Preferred Stock, or Digex Series A Preferred Stock, that remain outstanding subsequent to the Intermedia merger.

As of December 31, 2001, there were 568,455 shares of Intermedia Series B Preferred Stock outstanding. Dividends on the Intermedia Series B Preferred Stock accumulate at a rate of 13.5% of the aggregate liquidation preference thereof and are payable quarterly, in arrears. Dividends are payable in cash or, at Intermedia’s option, by the issuance of additional shares of Intermedia Series B Preferred Stock having an aggregate liquidation preference equal to the amount of such dividends. Historically, Intermedia has paid the Intermedia Series B Preferred Stock dividend by the issuance of additional shares of Intermedia Series B Preferred Stock. The Intermedia Series B Preferred Stock is

F-67

WorldCom Group (an integrated business of WorldCom, Inc.) NOTES TO COMBINED FINANCIAL, STATEMENTS (Continued)

DECEMBER 31,2001

(4) Company Obligated Mandatorily Redeemable Preferred Securities of Subsidiaries and Other

subject to mandatory redemption at its liquidation preference of $1,000 per share, plus accumulated and unpaid dividends on March 31, 2009. The Intermedia Series B Preferred Stock will be redeemable at the option of Intermedia at any time after March 31, 2002 at rates commencing with 106.75%, declining to 100% on March 31, 2007. Intermedia Series B Preferred Stock is generally entitled to one- tenth of one vote per share on all matters voting together with the common stock of Intermedia as a single class.

convertible into approximately 1,462,000 shares of Class A Common Stock of Digex. The Digex Series A Preferred Stock does not pay dividends and there are no voting rights.

Quarterly Income Preferred Securities, Series A, representing 30 million shares outstanding due June 30, 2026 and 475 shares of an authorized 500 shares of 6.375% cumulative preferred stock, Class A, or Class A Preferred Stock. Each share of Class A Preferred Stock has a par value of $0.01 per share and a liquidation preference of $100,000 per share. The Class A Preferred Stock is mandatorily redeemable at the redemption price of $100,000 per share plus accumulated and unpaid dividends on January 1, 2019. Dividends on the Class A Preferred Stock are payable quarterly at a rate per annum equal to 6.375% of the liquidation preference of $100,000 per share when, as and if declared.

Redeemable Preferred Securities-(Continued)

The Digex Series A Preferred Stock has an aggregate liquidation preference of $100 million, and is

As of December 31, 2001, we also had $750 million aggregate principal amount of 8% Cumulative

(5) Preferred Stock-

In October 2001, we exercised our option to redeem all of our outstanding Series B Preferred Stock. Prior to the redemption date, substantially all of the holders of our Series B Preferred Stock elected to convert the preferred stock into 0.1460868 shares of WorldCom group stock and 0.005843472 shares of MCI group stock for each share of Series B Preferred Stock held.

Preferred Stock was redeemed by us for $50.75 in cash, or approximately $190 million in the aggregate. In January 2000, each outstanding share of Series C $2.25 Cumulative Convertible Exchangeable

(6) Shareholder Rights Plan-

shareholder rights plan. See Note 7 to our consolidated financial statements for a detailed description of our existing

(7) Leases and Other Commitments-

and is also obligated under various right-of-way agreements having initial or remaining terms of more than one year and allocates rent expense on these leases attributable to the WorldCom group and the MCI group in accordance with our allocation policies. Rental expense allocated to the WorldCom group under these operating leases was $160 million, $203 million and $304 million in 1999, 2000 and 2001, respectively. The WorldCom group’s rental expense in 2001 increased as a result of our movement of technical facilities closer to our customers which should result in lower access costs in the

WorldCom leases office facilities and equipment under non-cancelable operating and capital leases

F-68


DECEMBER 31,2001

(7) Leases and Other Commitments-iContinued)

future, international expansion and to a lesser degree, the inclusion of Intermedia and annual rent escalation.

The WorldCom group is an integrated business of WorldCom and is therefore subject to all our liabilities and obligations, including leases and other commitments. See Note 8 to WorldCom’s consolidated financial statements for a description of our leases and other commitments.

(8) Contingencies-

The WorldCom group shareholders are subject to all of the risks related to an investment in WorldCom and the WorldCom group, including the effects of any legal proceedings and claims against the MCI group. See Note 9 to our consolidated financial statements for information related to our contingencies.


Stock Option Plans: WorldCom has several stock option plans under which options to acquire shares of WorldCom

group stock may be granted to directors, officers and employees of the WorldCom group and the MCI group. WorldCom accounts for these plans under APB Opinion No. 25, under which no compensation cost is recognized. Terms and conditions of WorldCom’s options, including exercise price and the period in which options are exercisable, generally are at the discretion of the Compensation and Stock Option Committee of our board of directors; however, no options are exercisable for more than 10 years after date of grant.

401(k) Plans:

WorldCom offers our qualified employees the opportunity to participate in one of our defined contribution retirement plans qualifying under the provisions of Section 401(k) of the Internal Revenue Code. Each employee may contribute on a tax deferred basis a portion of annual earnings not to exceed $10,500. WorldCom matches individual employee contributions in selected plans, up to a maximum level which in no case exceeds 6% of the employee’s compensation. Expenses allocated to the WorldCom group relating to our 401(k) plans were $45 million, $44 million and $47 million for the years ended December 31, 1999, 2000 and 2001, respectively.

Pension and Other Post-retirement Benefit Plans:

We maintain various defined benefit plans and other post-retirement benefit plans that cover selected eligible employees of the WorldCom group and the MCI group. Annual service cost is determined using the Projected Unit Credit actuarial method, and prior service cost is amortized on a straight-line basis over the average remaining service period of employees.

See Notes 10 and 11 to our consolidated financial statements for additional disclosures related to employee benefit plans.

F-69

WorldCom Group (an integrated business of WoddCom, Inc.) NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)

DECEMBER 31,2001

(10) Income Taxes-

income or deductions implicit in the combined balance sheets in the form of temporary differences. These temporary differences reflect the difference between the basis in the assets and liabilities for financial reporting purposes and amounts used for income tax purposes and the impact of available NOL carryforwards as measured in the WorldCom group’s combined financial statements and as measured by tax laws using enacted tax rates.

The WorldCom group combined balance sheets reflect the anticipated tax impact of future taxable

The provision for income taxes is composed of the following (in millions):

1999 2000 2001 _ _ _ _ _ _ ~

Current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (654) $ 580 $ (188) Deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,510 1,410 1,131

Total provision for income taxes . . . . . . . . . . . . . . . . . . . $1,856 $1,990 $ 943 _ _ _ _ _ _ _ ~

~ ~ _ _ _ _ _ ~ ~

The following is a reconciliation of the provision for income taxes to the expected amounts using the statutory rate:

1999 2000 2001 _ _ ~ ~ Expected statutory amount . . . . . . . . . . . . . . . . . . . . . . . . . . 35.0% 35.0% 35.0% Nondeductible amortization of excess of cost over net tangible

assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.7 6.0 10.4 State income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.5 2.6 (5.0) Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2.5) - - Tax credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (0.2) (0.4) (1.9) Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.6 (3.1) 0.3

Actual tax provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42.1% 40.1% 38.8% _ _ _ _ _ _

~ _ _ _ _ _ ~ _ _ _ _ _

The following is a summary of the significant components of the WorldCom group’s attributed deferred tax assets and liabilities as of December 31, 2000 and 2001 (in millions):

2000 2001

Fixed assets ......................... Goodwill and other intangibles . . . . . . . . . . . Investments . . . . . . . . . . . . . . . . . . . . . . . . . Other assets. ........................ Accrued liabilities . . . . . . . . . . . . . . . . . . . . . NOL carryforwards. . . . . . . . . . . . . . . . . . . . Tax credits .......................... Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Valuation allowance . . . . . . . . . . . . . . . . . . .

Assets Liabilities ~~

$ - $(3,957) (167)

(264)

- 363 -

745 - 517 - 692 -

2,317 (4,678)

$2,126 $(4,678)

-

(290)

_ _ _ _ ~ (191)

- ~ _ _ _

-

_ _ _ _ _ _ _ ~

_ _ _ ~ Assets Liabilities

$ - $(4,488) (52)

392 - (423)

348 - 1,186 -

676 - (129)

2,602 (5,092)

~~ $2,137 $(5,092)

-

-

- ~~

- (465) -~

~~

F-70

WorldCom Group (an integrated business of WoddCom, Inc.) NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)

DECEMBER 31,2001


income tax purposes of approximately $3.1 billion which expire in various amounts during the years 2011 through 2021. These NOL carryforwards result in a deferred tax asset of approximately $1.2 billion at December 31, 2001.

Approximately $1.7 billion of NOL carryforwards for federal income tax purposes relate to preacquisition NOL carryforwards attributable to entities acquired in transactions accounted for as purchases. These carryforwards and other deferred tax assets result in deferred tax assets for which a valuation allowance of $433 million has been established. If subsequent events or conditions dictate an increase in the need for a valuation allowance attributable to such deferred tax assets, the income tax expense for that period will be increased accordingly.

of $85 million outside the United States which generally do not expire. These carryforwards result in a $32 million deferred tax asset for which a valuation allowance has been established.

At December 31, 2001, the WorldCom group was attributed unused NOL carryforwards for federal

In addition, at December 31, 2001 the WorldCom group was attributed unused NOL carryforwards

(11) Supplemental Disclosure of Cash Flow Information-

amounted to $816 million, $488 million and $886 million, respectively. Income taxes paid by the WorldCom group, net of refunds, during the years ended December 31, 1999, 2000 and 2001 were $35 million, $28 million and $148 million, respectively.

liabilities assumed, including revisions to previously recorded acquisitions, and WorldCom common stock issued were as follows (in millions):

Interest paid by the WorldCom group during the years ended December 31, 1999, 2000 and 2001

In conjunction with business combinations attributed to the WorldCom group, assets acquired and

Fair value of assets acquired . . . . . . . Goodwill and other intangible assets . Liabilities assumed . . . . . . . . . . . . . . Preferred stock issued or assumed. . . WorldCom common stock issued. . . . Net cash paid . . . . . . . . . . . . . . . . .

1999 2000 2001

$ (92) $ - $ 1,932 _ _ ~ _ _ _

2,041 43 5,102 (935) (29) (4,201)

- (1,361) (228) - (1,266) -

~ ~ _ _ _ $ 786 $ 14 $ 206 ~ _ _ ~ - _ _ _ _ _


Based on our organizational structure, the WorldCom group operates in two reportable segments: Commercial voice, data and Internet and International operations. The WorldCom group’s reportable segments represent business units that primarily offer similar products and services; however, the business units are managed separately due to the type and class of customer as well as the geographic dispersion of their operations. The Commercial voice, data and Internet segment includes voice, data and other types of domestic communications services for commercial customers, and Internet services including dedicated access and web and application hosting services. International operations provide

F-71


DECEMBER 31,2001


voice, data, Internet and other similar types of communications services to customers primarily in Europe and the Asia Pacific region.

Our chief operating decision-maker utilizes revenue information in assessing performance and making overall operating decisions and resource allocations. Communications services are generally provided utilizing WorldCom’s fiber optic networks, which do not make a distinction between the types of services provided. Profit and loss information is reported only on a combined basis to the chief operating decision-maker and our board of directors.

significant accounting policies. Information about the WorldCom group’s segments is as follows (in millions):

The accounting policies of the segments are the same as those described in the summary of

Voice, data and Internet . . . . . . . . . . . . International operations . . . . . . . . . . . . Corporate-ther charges . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . .

Total before Embratel . . . . . . . . . . . . Embratel . . . . . . . . . . . . . . . . . . . . . . Elimination of intersegment revenue/

expenses . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . .

Revenues Fkom External Customers

1999 2000 2001

$14,817 $16,880 $18,371 1,624 2,367 2,977

~~~

- - - - - 523

~~~

16,964 19,247 21,348 2,854 3,662 -

(82) (154) - $19,736 $22,755 $21,348

~~~ ~~~

Selling, General and Administrative

1999 2000 2001

$2,655 $3,209 $3,895 774 1,094 1,409 - 433 754

170 -

3,599 4,736 6,058

~~~

- ~~~

610 980 -

(14) (27) -

$4,195 $5,689 $6,058 _ _ _ _ _ _ _ _ _ _ ~~~

Capital Expenditures 1999 2000 2001

$5,532 $ 8,376 $6,505 1,494 1,754 1,114

~~~

- - - - - 10

~~~

7,036 10,130 7,619 893 854 -

As discussed in Note 1, we deconsolidated our investment in Embratel as of January 1, 2001. Embratel, which provides communications services in Brazil, was designated as a separate reportable segment of the WorldCom group for periods prior to January 1, 2001. Accordingly, we have included Embratel in our WorldCom group segment information presented for 1999 and 2000.

which was sold to Electronic Data Systems Corporation in April 1999.

minority interests and cumulative effect of accounting change (in millions):

Additionally, Other includes the operations of MCI Systemhouse Corp and SHL, Systemhouse Co.

The following is a reconciliation of the segment information to income before income taxes,

Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . Other income (expense):

Interest expense ........................... Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Income before income taxes, minority interests and cumulative effect of accounting change . . . . . . . . . .

1999 2000

$19,736 $22,755 _ _ _ _ _ _ _ 15,105 17,714

4,631 5,041

~~

(460) (458) 237 385

~~

$ 4,408 $ 4,968 ~~ _ _ _ _ _ _ _ _ _

2001

$21,348 18,299 3,049

$ 2,432

F-72


DECEMBER 31,2001


millions): Information about the WorldCom group's operations by geographic areas are as follows (in

1999 2000 2001 Long-Lived

Revenues Assets

United States . . . . . . . . . . . . . . . . . . $14,760 $19,635 Brazil.. ...................... 2,772 4,017 All other international. . . . . . . . . . . . 2,204 2,575 Total ........................ $19,736 $26,227

~~

~~ ~~

Long - L i v e d Revenues Assets

$16,111 $27,643 3,508 4,008 3,136 3,526

$22,755 $35,177 ~~

~~ ~~

Long-Lived Revenues Assets

$17,778 $32,832

3,570 3,960 $21,348 $36,792

- - _ _ _ _ _ _

_ _ _ _ _ _ _ _ _ _ _ _ _

(13) Related Party lkansactions-

party transactions. See Note 16 to our consolidated financial statements for information pertaining to our related


Quarter Ended March 31,

2000 2001 ~~

Revenues . . . . . . . . . . . . . . . . $5,429 $5,203 Operating income . . . . . . . . . . 1,390 966 Income before cumulative

effect of accounting change . 741 548 Net income. . . . . . . . . . . . . . . 649 532

June 30, September 30, December 31, 2000 2001 2000 2001 2000 2001

$5,621 $5,362 $5,844 $5,482 $5,861 $5,301 1,364 310 1,139 999 1,148 774

_ _ _ _ _ _ _ _ _ _ _ _ _ _ ~ ~ (in millions)

732 126 599 503 601 347 716 110 583 460 585 305

F-73

INDEX TO FINANCIAL STATEMENTS

Page MCI Group (an integrated business of WorldCom, Inc.)

Report of independent public accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Combined balance sheets as of December 31, 2000 and 2001. . . . . . . . . . . . . . . . . . . . . . . . .

F-75 F-76

F-77

F-78

F-79

Notes to combined financial statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-80

Combined statements of operations for the three years ended December 31, 2001

Combined statements of allocated net worth for the three years ended December 31, 2001 . . . Combined statements of cash flows for the three years ended December 31, 2001. . . . . . . . . .

. . . . . . . . .

You should understand the following when reading the combined financial statements of the MCI

WorldCom has presented the combined financial statements of the MCI group at substantially the same level of detail as the consolidated financial statements of WorldCom. WorldCom believes that investors require detailed financial information for the MCI group to properly evaluate the market potential of MCI group stock;

group, which is an integrated business of WorldCom, Inc.:

the MCI group is a collection of WorldCom’s MCI businesses and is not a separate legal entity;

the holders of the MCI group stock are shareholders of WorldCom and do not have an ownership interest in the MCI group or any company in the MCI group or a claim on any of the assets attributed to the MCI group;

affect WorldCom’s ownership of these assets or responsibility for these liabilities and does not affect the rights of any creditor of WorldCom; and

WorldCom group.

the attribution of a portion of WorldCom’s assets and liabilities to the MCI group does not

the assets attributed to the MCI group could be subject to the liabilities attributed to the

F-74

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Shareholders of WorldCom, Inc.:

We have audited the accompanying combined balance sheets of the MCI group (an integrated business of WorldCom, Inc.) (as described in Note 1) as of December 31, 2000 and 2001, and the related combined statements of operations, allocated net worth and cash flows for each of the years in the three-year period ended December 31, 2001. These financial statements are the responsibility of WorldCom, Inc.’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the MCI group combined financial statements referred to above present fairly, in all material respects, the combined financial position of the MCI group as of December 31, 2000 and 2001, and the combined results of its operations and its cash flows for each of the years in the three- year period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States.

As discussed in Note 1 to the combined financial statements, effective January 1, 2000, the MCI group changed its method of accounting for certain activation and installation fee revenues and expenses.

1, the MCI group’s combined financial statements have been derived from the consolidated financial statements and accounting records of WorldCom, Inc. and, therefore, reflect certain assumptions and allocations. As more fully discussed in Note 1, the combined financial statements of the MCI group should be read in conjunction with the audited consolidated statements of WorldCom, Inc.

The MCI group is a fully integrated business of WorldCom, Inc. Accordingly, as described in Note

ARTHUR ANDERSEN LLP

Jackson, Mississippi March 7, 2002

F-75

MCI GROUP (an integrated business of WorldCom. Inc.) COMBINED BALANCE SHEETS

(In Millions)

December 31. 2000

ASSETS Current assets:

Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 41 Accounts receivable. net of allowance for bad debts of $514 in 2000 and

$393in2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. 835 Deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 395

2. 312

Transmission equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 405 Communications equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. 227 Furniture. fmtures and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 676 Construction in progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 170

Total current assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Property and equipment:

Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Goodwill and other intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3. 478

2. 246 9. 909

168 $14. 635

(1. 232)

LIABILITIES AND SHAREHOLDERS’ INVESTMENT Current liabilities:

Payable to WorldCom group. net . . . . . . . . . . . . . . Accrued interest . . . . . . . . . . . . . . . . . . . . . . . . . . Accounts payable and accrued line costs . . . . . . . . . Other current liabilities .....................

. . . . . . . . . . . . .

. . . . . . . . . . . . .

. . . . . . . . . . . . .

. . . . . . . . . . . . . Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Long-term liabilities. less current portion: Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Long-term payable to WorldCom group. net ...................... Deferred tax liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commitments and contingencies Allocated net worth . . . . . . . . . . . . . . . . ..........................

December 31 . 2001

$ 7

1. 574 10

335 1. 926

445 2. 444

680 130

3. 699 (1. 682) 2. 017 9. 719

227 $13. 889

$ 649 108

2. 438 914

$ 9 0 0 111

2. 093 1. 091

4.109 4. 195

6. o@) 976 928 159

8. 063

5. 505 976 870 30

7. 381

2. 463 2. 313 $14. 635 $13. 889


F-76

MCI GROUP (an integrated business of WoridCom, Inc.) COMBINED STATEMENTS OF OPERATIONS

(In Millions)

For the Years Ended December 31. 1999 2000 2001

~~~

Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $16,172 $16,335 $13,831 ~ ~ _ _ _ Operating expenses:

Line costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Selling, general and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other income (expense):

Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Income (loss) before income taxes and cumulative effect of accounting change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Income tax expense (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income (loss) before cumulative effect of accounting change . . . . . . . . . Cumulative effect of accounting change (net of income tax of $7 in

Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

7,087 5,071

757 12,915 3,257

(506) 5

2,756 1,109 1,647 __

-

$ 1,647

7,177 5,162

884 13,223 3,112

2,600 1,035 1,565

7,080 5,348

938 13,366

465


F-77

MCI GROUP (an integrated business of WorldCom. Inc.) COMBINED STATEMENTS OF ALLOCATED NET WORTH

For the Three Years Ended December 31. 2001 (In Millions)

Allocated net worth at December 31.1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Advances to WorldCom group. net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Allocated net worth at December 31. 1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Advances to WorldCom group. net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Allocated net worth at December 31.2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Advances from WorldCom group. net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dividends declared on MCI group common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Allocated net worth at December 31.2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$2. 950 1. 647

2. 500 1. 555

2. 463

15

$ 3 1 3 2.

(2. 097)

(1. 592)

(23)

(142)


F-78

MCI GROUP (an integrated business of WorldCom, Inc.) COMBINED STATEMENTS OF CASH FLOWS

(In Millions)

For the Years Ended December 31,

Cash flows from operating activities:

Adjustments to reconcile net income (loss) to net cash provided by Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Cumulative effect of accounting change ....................... Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

operating activities:

Provision for deferred income taxes (benefit) . . . . . . . . . . . . . . . . . . . Change in assets and liabilities, net of effect of business combinations:

Accounts receivable, net ............................... Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accounts payable and other current liabilities . . . . . . . . . . . . . . .

All other operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . Cash flows from investing activities:

Payable to WorldCom group, net ........................

Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Acquisitions and related costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Increase in intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Decrease in other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . All other investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Net cash used in investing activities. . . . . . . . . . . . . . . . . . . . . . . . . . . .

$1,647

-

757 393

(264) 24

530 555 11

3.653

$ 1,555

10 884 239

2,336

(773)

-

938 (27)

177 60

25 1 146

(133)

1,389 ~

Cash flows from financing activities: (495) Principal repayments on debt, net - -

(71) Dividends paid on MCI group common stock. Advances (to) from WorldCom group, net ..................... (2,097) ( 1,592) 15

Net cash used in financing activities ........................... (2,097) ( 1,592) (551) Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . 46 (29) (34) Cash and cash equivalents at beginning of period

........................... - - . . . . . . . . . . . . . . . . . .

~~~

~ _ _ _ _ _

. . . . . . . . . . . . . . . . . 24 70 41 Cash and cash equivalents at end of period ...................... $ 70 $ 41 $ 7

~~~

~~~ ~~~


F-79

MCI Group (an integrated business of WorldCom, Inc.) NOTES TO COMBINED FINANCIAL STATEMENTS

DECEMBER 31,2001

(1) The Company and Significant Accounting Policies-

Description of Business and Organization:

communications services to both U.S. and non-U.S. based businesses and consumers. We are a global communications company utilizing a strategy based on being able to provide service through our own facilities throughout the world instead of being restricted to a particular geographic location. We call this our “on-net’’ strategy. The on-net approach allows our customers to send data or voice communications across town, across the US., or to any of our networks in Europe or Asia, often without ever leaving our networks. The on-net approach provides our customers with superior reliability and low operating costs. Our core business is communications services, which includes voice, data, Internet and international services. We serve as a holding company for our subsidiaries’ operations. References herein to WorldCom, “we,” “OU~,” or “us” include WorldCom, Inc. and its subsidiaries, unless the context otherwise requires.

Organized in 1983, WorldCom, Inc., a Georgia corporation, provides a broad range of

Basis of Combination and Presentation:

On June 7, 2001, our shareholders approved a recapitalization involving the creation of two

WorldCom group stock, which is intended to reflect the performance of our data, Internet,

separately traded tracking stocks:

international and commercial voice businesses and is quoted on The Nasdaq National Market under the trading symbol “WCOM”, and

MCI group stock, which is intended to reflect the performance of our consumer, small business, wholesale long distance voice and data, wireless messaging and dial-up Internet access businesses and is quoted on The Nasdaq National Market under the trading symbol “MCIT”.

In connection with the recapitalization, we amended our articles of incorporation to replace our existing common stock with two new series of common stock that are intended to reflect, or track, the performance of the businesses attributed to the WorldCom group and the MCI group. Effective with the recapitalization on June 7, 2001, each share of our existing common stock was changed into one share of WorldCom group stock and 1/25 of a share of MCI group stock.

investors based upon the financial performance of a distinct business unit of the company, sometimes referred to as the targeted business. These targeted businesses are collections of businesses that we have grouped together in order for us to issue WorldCom group stock and MCI group stock. The ownership of the targeted business does not change, and while each of the classes of stock trade separately, all shareholders are common shareholders of a single company, WorldCom, and are subject to all risks of an investment in WorldCom as a whole.

stock. A cash dividend of $0.60 per share of MCI group stock, or approximately $70 million in the aggregate, was paid on October 15, 2001 to shareholders of record as of the close of business on September 28, 2001. Dividends of $0.60 per share of MCI group stock were also declared in the third and fourth quarters of 2001, which have been or will be paid in 2002.

A tracking stock is a separate class of a company’s common stock intended to provide a return to

During the second quarter of 2001, we declared the initial quarterly dividend for the MCI group

F-80

MCI Group (an integrated business of WorldCom, Inc.) NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)

DECEMBER 31,2001


The MCI group was initially allocated notional debt of $6 billion and our remaining debt was allocated on a notional basis to the WorldCom group. We intend, for so long as the WorldCom group stock and the MCI group stock remains outstanding, to include in our filings under the Securities Exchange Act of 1934, as amended, the combined financial statements of each of the WorldCom group and the MCI group. These combined financial statements will be prepared in accordance with accounting principles generally accepted in the United States, and in the case of annual financial statements, will be audited. These combined financial statements are not legally required under current law or SEC regulations.

Voting rights of the holders of the WorldCom group and the MCI group stock are prorated based on the relative market values of WorldCom group stock and MCI group stock. We will conduct shareholder meetings that encompass all holders of voting stock. The WorldCom group and the MCI group shareholders will vote together as a single class on all matters brought to a vote of shareholders, including the election of our directors.

Our board of directors may at any time convert each outstanding share of MCI group stock into shares of WorldCom group stock at 110% of the relative trading value of MCI group stock for the 20 days prior to the announcement of the conversion. No premium will be paid on a conversion that occurs after June 7, 2004.

If all or substantially all of the WorldCom group or MCI group assets are sold, either: (i) the relevant shareholders will receive a distribution equal to the fair value of the net proceeds of the sale, either by special dividend or by redemption of shares; or (ii) each outstanding share of MCI group stock will be converted into shares of WorldCom group stock at 110% or 100% of the relative trading value of MCI group stock for a 10 trading day period following the sale.

Intergroup Allocation Policies:

'backing Stock Policy Statement

Our board of directors has fiduciary duties to all shareholders of WorldCom, and no independent fiduciary duties to the holders of WorldCom group stock and MCI group stock. Our board of directors has adopted a policy statement regarding the WorldCom group and the MCI group matters. Our board of directors or any special committee appointed by our board of directors, may, without shareholder approval, change the policies set forth in our policy statement. Our board of directors or any special committee appointed by our board of directors also may, without shareholder approval, adopt additional policies or make exceptions with respect to the application of the policies described in our policy statement in connection with particular facts and circumstances, all as they may determine to be in the best interests of WorldCom. The material provisions of the policy statement are as follows:

General Policy. The policy statement provides that all material matters as to which the holders of WorldCom group stock and MCI group stock may have potentially divergent interests will be resolved in a manner that our board of directors or any special committee appointed by our board of directors determines to be in the best interests of WorldCom as a whole, after giving due consideration to the potentially divergent interests and all other interests of the holders of the separate series of common stock of WorldCom that our board of directors or any special committee, as the case may be, deems relevant. The policy statement provides that we will manage the businesses in the WorldCom group and

F-81


DECEMBER 31,2001


the MCI group in a manner intended to maximize the operations, assets and values of both groups, and with complementary deployment of personnel, capital and facilities, consistent with their respective business objectives.

Under this policy statement, all material transactions which are determined by our board of directors to be in the ordinary course of business between the WorldCom group and the MCI group, except for those described in the paragraphs below, are intended to be on terms consistent with terms that would be applicable to arm’s-length dealings with unrelated third parties.

Cash Management. Decisions regarding the investment of surplus cash, the issuance and retirement of debt, and the issuance and repurchase of common and preferred stock will continue to be made by WorldCom management on behalf of the groups. Under this centralized cash management system, the MCI group will generally not be allocated any cash balances.

Corporate Allocations

group based upon identification of the services specifically benefiting each group. Such corporate allocations may change at our discretion and do not require shareholder approval. Management believes that the allocation methodologies applied are reasonable and these methods have been consistently applied for all periods presented. However, it is not practical to determine whether the allocated amounts represent amounts that would have been incurred on a stand alone basis. Explanations of the composition and the method of allocation for such items are described below.

Corporate allocations have been attributed and/or allocated to the WorldCom group or the MCI

Shared Corporate Services. We have directly charged specifically identifiable costs to the WorldCom group and the MCI group. Where determinations based on specific usage alone were impracticable, we used other allocation methods that we believe are fair, including methods based on factors such as the number of employees and total line costs or revenues generated by each group. For the years ended December 31, 1999, 2000, and 2001, the MCI group was allocated $1.6 billion, $1.9 billion and $1.6 billion of these costs, respectively.

Commercial Inter-group Dansactions. The MCI group is allocated a proportion, based on usage, of our fiber optic system costs for use of the fiber optic systems, which are attributed to the WorldCom group. For the years ended December 31, 1999, 2000 and 2001, fiber optic system costs allocated to the MCI group were $189 million, $373 million and $360 million, respectively. In addition, the WorldCom group is allocated a proportion, based on usage, of our switching costs for use of the business voice switched services, which are attributed to the MCI group and the MCI group is allocated a corresponding decrease to depreciation expense which, for the years ended December 31, 1999, 2000 and 2001, totaled $64 million, $87 million and $101 million, respectively. Selling, general and administrative expenses for the MCI group include allocated costs for the MCI group’s proportionate share of costs associated with buildings, furniture and fMures attributed to the WorldCom group, and the cost allocated to the MCI group for use of the MCI tradenames as discussed below. For the years ended December 31, 1999, 2000 and 2001, these allocated costs totaled $331 million, $254 million and $360 million, respectively.

F-82


DECEMBER 31,2001


are intended, to the extent practicable, to be on terms consistent with terms that would be applicable to arm’s-length dealings with unrelated third parties and will be subject to the review and approval of our board of directors or any special committee. Neither group is under any obligation to use services provided by the other group, and each group may use services provided by a competitor of the other group if our board of directors or any special committee determines it is in the best interests of WorldCom as a whole.

All other material commercial transactions in the ordinary course of business between the groups

Allocation of Intangible Assets. Intangible assets consist of the excess consideration paid over the fair value of net tangible assets acquired by us in business combinations accounted for under the purchase method and include goodwill, channel rights, developed technology and tradenames. These assets have been attributed to the respective groups based on specific identification and where acquired companies have been divided between the WorldCom group and the MCI group, the intangible assets have been attributed based on the respective fair values at date of purchase of the related operations attributed to each group. Management believes that this method of allocation is equitable and provides a reasonable estimate of the intangible assets attributable to the WorldCom group and the MCI group.

All tradenames, including the MCI tradename and the other related MCI tradenames, have been attributed to the WorldCom group. The MCI group will be allocated an expense, and the WorldCom group will be allocated a corresponding decrease in depreciation and amortization expense for the use of the MCI tradenames for the next four years based on the following fee schedule:

2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $30.0 million 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $35.0 million 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $40.0 million 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $45.0 million

Any renewal or termination of use of the MCI tradenames by the MCI group will be subject to the general policy that our board of directors will act in the best interests of WorldCom. For each of the years ended December 31, 1999, 2000 and 2001, an expense of $27.5 million per annum was allocated to the MCI group for use of the MCI tradenames.

Financing Arrungemnts. As of January 1, 1999, $6.0 billion of our outstanding debt was notionally allocated to the MCI group and the remainder of our debt was notionally allocated to the WorldCom group. Our debt was allocated between the WorldCom group and the MCI group based upon a number of factors including estimated future cash flows and the ability to pay debt service and dividends of each of the groups. In addition, management considered certain measures of creditworthiness, such as coverage ratios and various tests of liquidity, in the allocation process. Our management believes that the initial allocation was equitable and supportable by both the WorldCom group and the MCI group. The debt allocated to the MCI group bears interest at a rate indicative of the rate at which the MCI group would borrow from third parties if it was a wholly owned subsidiary of WorldCom but did not have the benefit of any guarantee by WorldCom. Interest rates are calculated on a quarterly basis. Debt allocated to the MCI group bears an interest rate equal to the weighted-average interest rate, excluding capitalized interest, of WorldCom debt plus 1 1/4 percent. Interest allocated to the WorldCom group reflects the difference between our actual interest expense and the interest expense charged to the MCI

F-83


DECEMBER 31,2001


group. Subsequent to the recapitalization, each group’s allocated debt increases or decreases by the amount of any net cash generated by, or required to fund, the group’s operating activities, investing activities, dividend payments, share repurchases and other financing activities.

As of December 31, 2001, our receivables purchase program consisted of a $3.7 billion pool of receivables in which the purchaser owned an undivided interest, including the $2.0 billion sold, of which $920 million and $273 million relate to the MCI group, respectively. The receivables sold were assigned based on specific identification where practical, or allocated based on total revenues. Our management believes that this method of allocation is equitable and provides a reasonable estimate of the receivables attributable to the groups.

Fair Value of Financial Instruments:

See Note 1 to our consolidated financial statements for additional fair value descriptions.

Cash and Cash Equivalents:

less as cash and cash equivalents. We consider cash in banks and short-term investments with original maturities of three months or

Property and Equipment:

purposes using the straight-line method over the following estimated useful lives: Property and equipment are stated at cost. Depreciation is provided for financial reporting

Transmission equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Communications equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Furniture, furtures, buildings and other . . . . . . . . . . . . . . . . . . . . . . .

4 to 10 years 5 to 10 years 4 to 39 years

We evaluate the recoverability of property and equipment when events and circumstances indicate that such assets might be impaired. We determine impairment by comparing the undiscounted future cash flows estimated to be generated by these assets to their respective carrying amounts. In the event an impairment exists on property and equipment attributed to the MCI group, a loss will be recognized by the MCI group based on the amount by which the carrying value exceeds the fair value of the asset. If quoted market prices for an asset are not available, fair market value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved. Losses on property and equipment to be disposed of are determined in a similar manner, except that fair market values are reduced for the cost to dispose.

The cost and related reserves of assets sold or retired are removed from the accounts, and any resulting gain or loss is reflected in results of operations.

Maintenance and repairs are expensed as incurred. Replacements and betterments are capitalized.

F-84


DECEMBER 31,2001


Goodwill and Other Intangible Assets:

2001 are summarized below (in millions): The major classes of intangible assets attributed to the MCI group as of December 31, 2000 and

Amortization Period 2000 2001 ~~

Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 to 40 years $9,274 $9,274

Other intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 to 10 years 1,113 1,443 10,897 11,227

Less: accumulated amortization Goodwill and other intangible assets, net

Intangible assets are amortized using the straight-line method for the periods noted above.

Goodwill is recognized for the excess of the purchase price of the various business combinations

Developed technology. ......................... 5 to 10 years 510 510 _ _ _ _ _

. . . . . . . . . . . . . . . . . . . (988) (1,508) . . . . . . . . . . . . . $9,909 $9,719

~~

~~ ~~

over the value of the identifiable net tangible and intangible assets acquired. Realization of acquisition- related intangibles, including goodwill, is periodically assessed by our management based on the current and expected future profitability and cash flows of acquired companies and their contribution to the overall operations of the MCI group.

Also included in other intangibles are costs incurred to develop software for internal use. Such costs were $356 million, $160 million and $325 million for the years ended December 31, 1999, 2000 and 2001, respectively.

Recognition of Revenues:

Service activation and installation fees are amortized over the average customer contract life. The MCI group records revenues for telecommunications services at the time of customer usage.

Accounting for Reciprocal Compensation and Other:

behalf of other carriers’ customers and is determined contractually based on fmed rate per minute charges to those carriers. Small business and consumer primary interexchange carrier charges, or PICC, are flat-rate charges mandated by the FCC which apply to telecommunications companies that connect to customers through a traditional phone company’s facilities. Effective July 1, 2000, as a result of the FCC’s Coalition for Affordable Local and Long Distance Services, or CALLS order, the PICC fee is billed directly to the customer by the traditional phone company rather than to MCI group and rebilled to the customer. Central office based remote access equipment sales represent the reimbursement of customer specific equipment costs incurred by MCI group on behalf of the customer as part of service provisioning. As such, we have determined that it is more appropriate to reflect these reimbursements of our cost as an offset to cost of sales rather than reporting these reimbursements on a gross basis as revenues. During the years ended December 31, 1999,2000 and 2001, such cost reimbursement amounts recorded by the MCI group totaled $817 million, $802 million and $366 million, respectively.

Reciprocal compensation represents a reimbursement of costs for call termination performed on

F-85


DECEMBER 31,2001


Cumulative Effect of Accounting Changes:

During the fourth quarter of 2000, the MCI group implemented SAB 101, which requires certain activation and installation fee revenues to be amortized over the average life of the related service rather than be recognized immediately. Costs directly related to these revenues may also be deferred and amortized over the customer contract life. As required by SAB 101, the MCI group retroactively adopted this accounting effective January 1, 2000, which resulted in a one-time expense of $10 million, net of income tax benefit of $7 million. The pro forma effect of adopting SAB 101 on periods prior to January 1, 2000 was not material to the MCI group’s financial position or results of operations.

Income Taxes:

The federal and state income tax liabilities incurred by WorldCom and which are determined on a consolidated, combined, or unitary basis are allocated between the WorldCom group and the MCI group in accordance with our policy statement. The income tax expense or benefit for each group and the balance sheet allocation of the expense is based on a comparison of our tax expense with the hypothetical tax expense or benefit of the MCI group. The tax expense or benefit allocable to the MCI group is the amount that the MCI group would have incurred if it had filed tax returns as a separate taxpayer and the tax expense allocable to the WorldCom group is the excess, if any, of our tax expense over the tax expense or benefit allocable to the MCI group. Tax benefits that cannot be used by a group generating those benefits but can be used on a consolidated basis are credited to the group that generated those benefits. Had the WorldCom group and the MCI group filed separate tax returns, the provision for income taxes and net income for each group would not have significantly differed from the amounts reported on the group’s combined statements of operations for the years ended December 31, 1999, 2000 and 2001. However, the amounts of current and deferred taxes and taxes payable or refundable attributed to each group on the historical financial statements may differ from those that would have been allocated had the WorldCom group or the MCI group filed separate income tax returns.

Deferred tax assets and liabilities are based on temporaly differences between the carrying amounts of assets and liabilities for financial reporting purposes and their respective tax bases, and the impact of available net operating loss, or NOL, carryfonvards.

Earnings Per Share:

Our consolidated financial statements present basic and diluted earnings (loss) per share for WorldCom group stock and MCI group stock using the two-class method. The two-class method is an earnings formula that determines the attributed earnings (loss) per share for WorldCom group stock and MCI group stock according to participation rights in undistributed earnings. The combined financial statements of the MCI group do not present earnings (loss) per share because MCI group stock is a series of our common stock, and the MCI group is not a legal entity with a capital structure.

For purposes of our consolidated financial statements, basic earnings (loss) per share attributed to MCI group stock is computed by dividing attributed net income (loss) for the period by the number of weighted-average shares of MCI group stock then outstanding. Diluted earnings (loss) per share attributed to MCI group stock is computed by dividing attributed net income (loss) for the period by

F-86


DECEMBER 31,2001


the weighted-average number of shares of MCI group stock outstanding, including the dilutive effect of MCI group stock equivalents.

Concentration of Credit Risk

A portion of the MCI group’s revenues is derived from services provided to others in the telecommunications industry, mainly resellers of long distance telecommunications service and Internet online services. As a result, the MCI group has some concentration of credit risk among its customer base. The MCI group performs ongoing credit evaluations of its larger customers’ financial condition and, at times, requires collateral from its customers to support its receivables, usually in the form of assignment of its customers’ receivables to the MCI group in the event of nonpayment.

Recently Issued Accounting Standards:

In June 2001, the FASB issued SFAS No. 141 “Business Combinations” and SFAS No. 142 “Goodwill and Other Intangible Assets.” SFAS No. 141 requires business combinations initiated after June 30, 2001, to be accounted for using the purchase method of accounting and broadens the criteria for recording intangible assets separate from goodwill. Recorded goodwill and intangibles will be evaluated against this new criteria and may result in certain intangibles being subsumed into goodwill, or alternatively, amounts initially recorded as goodwill may be separately identified and recognized apart from goodwill. Under the new rules, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests. The statement includes provisions for the identification of reporting units for purposes of assessing potential future impairments of goodwill. Upon adoption, we stopped amortizing intangible assets with indefinite useful lives, including goodwill and tradenames. Based on current levels of such assets, this will reduce amortization expense by approximately $0.3 billion annually at the MCI group. Additionally, we are conducting impairment reviews of all intangible assets with indefinite useful lives and we expect to complete this assessment no later than the second quarter of 2002, in accordance with the provisions of SFAS No. 142. Based on our preliminary analyses, we estimate that as a result of the adoption of SFAS No. 142 we will reduce goodwill by approximately $1 billion at the MCI group.

In June 2001, the FASB issued SFAS No. 143 “Asset Retirement Obligations,” which establishes new accounting and reporting standards for legal obligations associated with retiring assets. The fair value of a liability for an asset retirement obligation must be recorded in the period in which it is incurred, with the cost capitalized as part of the related long-lived assets and depreciated over the asset’s useful life. Changes in the liability resulting from the passage of time will be recognized as operating expenses. SFAS No. 143 must be adopted by 2003. We have not yet quantified the impact of adopting SFAS No. 143 on our consolidated results of operations or financial position.

In August 2001, the FASB issued SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets,” which supersedes both SFAS No. 121 ‘Accounting for the Impairment of Long- Lived Assets for Long-Lived Assets to be Disposed Of,” and the accounting and reporting provisions for the disposal of a segment of a business contained in APB Opinion No. 30, “Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions.” SFAS No. 144 establishes a single accounting model for long-lived assets to be disposed of by sale and broadens the presentation of

F-87


DECEMBER 31,2001


discontinued operations. The provisions of SFAS No. 144 are effective beginning in 2002 and are not expected to have a material impact on our consolidated results of operations or financial position.

Use of Estimates:

The preparation of financial statements in conformity with accounting principles generally accepted in the United States, or GAAP, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the period reported. Actual results could differ from those estimates. Estimates are used when accounting for allowance for doubtful accounts, revenue reserves, depreciation and amortization, taxes and contingencies.

(2) Business Combinations-

We have acquired other telecommunications companies offering similar or complementary services to those offered by us. These acquisitions have been accomplished through the purchase of the outstanding stock or assets of the acquired entity for cash, notes, shares of our common stock, or a combination thereof. The cash portion of acquisition costs has generally been financed through our bank credit facilities.

On October 1, 1999, we acquired SkyTel Communications, Inc., pursuant to the merger of SkyTel with and into a wholly owned subsidiary of WorldCom. Upon consummation of the SkyTel merger, the wholly owned subsidiary was renamed SkyTel Communications, Inc. SkyTel is a leading provider of nationwide messaging services in the Untied States. SkyTel principal operations include one-way messaging services in the Untied States, advanced messaging services on the narrow band personal communications services network in the Untied States and international one-way messaging operations.

F-88

MCI Group (an integrated business of WorldCom, Inc.) NOTES TO COMBINED FINANCIAL STATEMENTS

DECEMBER 31,2001

(2) Business Combinations- (Continued)

As a result of the SkyTel merger, each outstanding share of SkyTel common stock was converted into the right to receive 0.3849 shares of WorldCom common stock, par value $.01 per share, or approximately 23 million WorldCom common shares in the aggregate. Holders of SkyTel’s $2.25 Cumulative Convertible Exchangeable Preferred Stock received one share of WorldCom Series C $2.25 Cumulative Convertible Exchangeable Preferred Stock for each share of SkyTel preferred stock held. The SkyTel merger was accounted for as a pooling-of-interests; and accordingly, our financial statements for periods prior to the SkyTel merger have been restated to include the results of SkyTel. SkyTel has been allocated to the MCI group.

During 1999, 2000 and 2001, we recorded other liabilities of $582 million, $29 million and $254 million, respectively, related to estimated costs of unfavorable commitments of acquired entities, and other non-recurring costs arising from various acquisitions and mergers. At December 31, 1999, 2000 and 2001, other liabilities attributed to the MCI group related to these and previously recorded accruals totaled $160 million, $106 million and $53 million, respectively.

(3) Long-Term Debt-

Our outstanding debt as of December 31, 2000 and 2001 consists of the following (in millions):

Commercial paper and credit facilities . . . . . . . . . . . . . . . . . . . Floating rate notes due 2001 through 2002. . . . . . . . . . . . . . . . 7.88% - 8.25% Notes Due 2003-2010 . . . . . . . . . . . . . . . . . . . . 7.38% Notes Due 2006-2011 . . . . . . . . . . . . . . . . . . . . . . . . . . 6.13% - 6.95% Notes Due 2001-2028 .................... 7.13% - 7.75% Notes Due 2004-2027 .................... 8.88% Senior Notes Due 2006. ........................ 7.13% . 8.25% Senior Debentures Due 2023-2027 6.13% - 7.50% Senior Notes Due 2004-2012. . . . . . . . . . . . . . . 6.50% - 8.25% Notes Due 2004-2031 .................... Intermedia 11.25%-12.25% Senior Discount Notes Due

2007-2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Intermedia 8.50%-9.50% Senior Notes Due 2007-2009

Embratel debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

. . . . . . . . . .

. . . . . . . Capital lease obligations (maturing through 2017) . . . . . . . . . . .

Other debt (maturing through 2008) ....................

2000

$ 3,629 1,560 3,500 2,000 6,100 2700

672 1,436 1,934

- -

413 1,134

518

2001

$ - 60

3,500 2,000 4,600 2,000

1,434 1,925

11,939

-

643 581 953 -

575

Notional debt allocated to the WorldCom group. . . . . . . . . . . . Notional debt allocated to the MCI group . . . . . . . . . . . . . . . .

24,896 (18,896)

$ 6,000

30,210 (24,705)

$ 5,505

See Note 1 for a more detailed description of how we allocate debt to the groups and Note 4 of our consolidated financial statements for additional debt descriptions.

F-89


DECEMBER 31,2001

(4) Shareholder Rights Plan-

shareholder rights plan. See Note 7 to our consolidated financial statements for a detailed description of our existing

(5) Leases and Other Commitments-

and is also obligated under various rights-of-way agreements having initial or remaining terms of more than one year and allocates rent expense on these leases attributable to the WorldCom group and the MCI group in accordance with our allocation policies. Rental expense allocated to the MCI group under these operating leases was $163 million, $189 million and $213 million in 1999, 2000 and 2001, respectively. The MCI group’s rental expense in 2001 increased as a result of our movement of technical facilities closer to our customers which should result in lower access costs in the future and annual rent escalation.

WorldCom leases office facilities and equipment under non-cancelable operating and capital leases

The MCI group is an integrated business of WorldCom and is therefore subject to all our liabilities and obligations, including leases and other commitments. See Note 8 to our consolidated financial statements for a description of our leases and other commitments.

(6) Contingencies-

and the MCI group, including the effects of any legal proceedings and claims against the WorldCom group. See Note 9 to our consolidated financial statements for information related to our contingencies.

The MCI group shareholders are subject to all of the risks related to an investment in WorldCom


Stock Option Plans:

WorldCom has several stock option plans under which options to acquire shares of WorldCom group stock may be granted to directors, officers and employees of the WorldCom group and the MCI group. We do not maintain a plan for the issuance of MCI group stock options. WorldCom accounts for these plans under APB Opinion No. 25, under which no compensation cost is recognized. Terms and conditions of WorldCom’s options, including exercise price and the period in which options are exercisable, generally are at the discretion of the Compensation and Stock Option Committee of our board of directors; however, no options are exercisable for more than 10 years after date of grant.

401(k) Plans:

WorldCom offers our qualified employees the opportunity to participate in one of our defined contribution retirement plans qualifying under the provisions of Section 401(k) of the Internal Revenue Code. Each employee may contribute on a tax deferred basis a portion of annual earnings not to exceed $10,500. WorldCom matches individual employee contributions in selected plans, up to a maximum level which in no case exceeds 6% of the employee’s compensation. Expenses allocated to the MCI group relating to our 401(k) plans were $63 million, $68 million and $56 million for the years ended December 31, 1999, 2000 and 2001, respectively.

F-90


DECEMBER 31,2001

(7) Employee Benefit Plans- (Continued)

Pension and Other Post-retirement Benefit Plans:

We maintain various defined benefit plans and other post-retirement benefit plans that cover selected eligible employees of the WorldCom group and the MCI group. Annual service cost is determined using the Projected Unit Credit actuarial method, and prior service cost is amortized on a straight-line basis over the average remaining service period of employees.

Employee Stock Purchase Plan:

Section 423 of the Code which allows eligible MCI group employees to purchase shares of the MCI group stock through payroll deductions not to exceed 15% of the employee’s compensation. The purchase price is 85% of the lower of the fair market value of the MCI group stock on the participant’s enrollment date or the exercise date. A maximum of 10 million shares of MCI group stock are authorized for issuance. During 2001 shares totaling 346,000 were issued at an average price of $13.10 per share.

See Notes 10 and 11 to our consolidated financial statements for additional disclosures related to employee benefit plans.

Effective July 1, 2001, we established the MCI group 2001 Employee Stock Purchase Plan under

(8) Income Taxes-

income or deductions implicit in the combined balance sheets in the form of temporary differences. These temporary differences reflect the difference between the basis in the assets and liabilities for financial reporting purposes and amounts used for income tax purposes and the impact of available NOL carryforwards as measured in the MCI group’s combined financial statements and as measured by tax laws using enacted tax rates.

The MCI group combined balance sheets reflects the anticipated tax impact of future taxable

Income tax expense (benefit) is composed of the following (in millions):

1999 2000 2001 _ _ _ _ _ _ _ _ Current. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 716 $ 796 $ 11 Deferred.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 393 239 (27) Total income tax expense (benefit) . . . . . . . . . . . . . . . . . . $1,109 $1,035 $ (16)

~~~

~~~ _ _ _ _ _ _ _ _ _ _ _

F-91


DECEMBER 31,2001


The following is a reconciliation of income tax provision to the expected amounts using the statutory rate:

1999 2000 2001 ~~~

Expected statutory amount . . . . . . . . . . . . . . . . . . . . . . . 35.0% 35.0% (35.0)% Nondeductible amortization of excess of cost over net

tangible assets acquired ........................ 3.0 3.1 193.9 State income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.5 2.6 5.0 Tax credits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (0.2) (0.4) (59.4) Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (0.1) (0.5) (145.5)

~~~

Actual tax provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40.2% 39.8% (41.0)%

The following is a summary of the significant components of the MCI group’s attributed deferred

~~~ _ _ _ _ _ _ _ _ _

tax assets and liabilities as of December 31, 2000 and 2001 (in millions):


~~

Fixed assets ...................... $ - $ (822) 45

Accrued liabilities -

Tax credits . . . . . . . . . . . . . . . . . . . . . . . 68 Other

- Goodwill and other intangibles. . . . . . . . . (102)

NOL carryforwards . . . . . . . . . . . . . . . . . - -

(76)

. . . . . . . . . . . . . . . . . .

-

.... . . . . . . . . . . . . . . . . . . . . . . . - _ _ _ _ _ _ $ 113 $ (1,000)

~~ ~~


$ - $ (1,092) _ _ _ _ _ _ _ _

- 41 46

129 10 6

- - - -

_ _ _ _ _ _ _ $ 232 $ (1,092)

~~ ~~

At December 31, 2001, the MCI group was attributed unused NOL carryforwards for federal income tax purposes of approximately $340 million which expire in various amounts during the year 2021. These NOL carryforwards result in a deferred tax asset of approximately $129 million at December 31, 2001.

(9) Supplemental Disclosure of Cash Flow Information-

amounted to $490 million, $564 million and $501 million, respectively. Income taxes paid, net of refunds, during the years ended December 31, 1999 and 2000 were $71 million and $424 million, respectively. No income taxes were paid during the year ended December 31, 2001.

Interest paid by the MCI group during the years ended December 31, 1999, 2000 and 2001

F-92


DECEMBER 31,2001

(9) Supplemental Disclosure of Cash Flow Information- (Continued)

liabilities assumed, including revisions to previously recorded acquisitions, were as follows (in millions): In conjunction with business combinations attributed to the MCI group, assets acquired and

1999

Fair value of assets acquired ........................... $154 Goodwill and other intangible assets . . . . . . . . . . . . . . . . . . . . . 190

WorldCom common stock issued -

Net cash paid. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $292

__

Liabilities assumed (52) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ........................

~

__ ~

2000 __

$-

2001 ~

$-


Consumer; Wholesale; Alternative channels and small business; and Dial-up Internet. The MCI group’s reportable segments represent business units that primarily offer similar products and services; however, the business units are managed separately due to the type and class of customer as well as the geographic dispersion of their operations. Consumer includes domestic voice communications services for consumer customers. Wholesale includes domestic long distance voice and data communications services for wholesale customers. Alternative channels and small business includes domestic long distance voice and data, agents, prepaid calling cards and paging services provided to alternative wholesale and small business customers. Dial-up Internet includes dial-up Internet access services.

Our chief operating decision-maker utilizes revenue information in assessing performance and making overall operating decisions and resource allocations. Communications services are generally provided utilizing WorldCom’s fiber optic networks, which do not make a distinction between the types of services provided. Profit and loss information is reported only on a combined basis to our chief operating decision-maker and our board of directors.

The accounting policies of the segments are the same as those described in the summary of significant accounting policies. Information about the MCI group’s segments is as follows (in millions):

Revenues -om Selling, General and Capital External Customers Administrative Expenditures

1999 2000 2001 1999 2000 2001 1999 2000 2001

Consumer. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,590 $ 7,778 $ 7,227 $3,275 $2,823 $2,968 $235 $146 $ 89 Wholesale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,943 3,388 2,641 620 538 617 192 94 32 Alternative channels and small business . . . . . . . . . . . . . 3,142 3,541 2,427 808 1,030 1,092 182 75 109 Dial-up Internet. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,497 1,628 1,536 368 426 537 178 185 37

345 134 - - - Corporate-ther charges

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $16,172 $16,335 $13,831 $5,071 $5,162 $5,348 $787 $500 $267

Based on our organizational structure, the MCI group operates in four reportable segments:

~ _ _ _ _ _ _ _ _ _ _ _ _ ~ ~ ~

- - - .. . . . . . . . . . . . . . . . . . . . . - ~ ~ _ _ _ _ _ _ _ _ _ _ ~ ~ ~

_ _ _ _ _ _ _ _ ~ _ _ _ _ _ _ _ _ _ _ _ _ ~ _ _ _ _ _ _ _ ~ ~ _ _ _ _ _ ~ _ _ ~

F-93


DECEMBER 31,2001


The following is a reconciliation of the segment information to income (loss) before income taxes and cumulative effect of accounting change (in millions):

1999 2000 2001 ~~~

Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $16,172 $16,335 $13,831 Operating expenses .......................... 12,915 13,223 13,366

Other income (expense):

~ _ _ _ _ _ _ _ _ _ _ _ Operating income ........................... 3,257 3,112 465

Interest expense ......................... (506) (512) (504) ........................... 5 Miscellaneous - -

~~~

Income (loss) before income taxes and cumulative effect of accounting change. . . . . . . . . . . . . . . . . . . $ 2,756 $ 2,600 $ (39)

~~~ ~~~

Information about the MCI group’s operations by geographic areas are as follows (in millions):

1999 Long-lived

Revenues Assets

United States . . . . . . . . . . . . . . . . . . . $15,961 $2,330 .................... 21 1 61 International

Total.. . . . . . . . . . . . . . . . . . . . . . . . . $16,172 $2,391

~ _ _ _

~~

~~ _ _ _ _ _ _

2000 Long-lived

Revenues Assets

$16,066 $2,173 269 73

$16,335 $2,246

_ _ _ _ _ _ _ _ _ _ _ _

~~

~~ ~~

2001 Long-lived

Revenues Assets

$13,650 $1,967 181 50

$13,831 $2,017

_ _ _ _ _ _ _ ~

~~

~~ ~~

(11) Related Party Transactions-

party transactions. See Note 16 to our consolidated financial statements for information pertaining to our related


March 31. 2000 2001 _ _ ~

Revenues. . . . . . . . . . . . . . . . . . . . . . $4,183 $3,622 Operating income (loss). . . . . . . . . . . . 1,034 231 Income (loss) before cumulative effect

Net income (loss) . . . . . . . . . . . . . . . . 537 62 of accounting change . . . . . . . . . . . . 547 62

Quarter Ended June 30, September 30, December 31,

2000 2001 2000 2001 2000 2001

$4,186 $3,548 $4,193 $3,484 $3,773 $3,177

_ _ _ _ _ _ _ _ ~ ~ ~ (in millions)

1,023 74 713 181 342 (21)

541 (29) 352 33 125 (89) 541 (29) 352 33 125 (89)

F-94

EXHIBIT INDEX

2.1*

3.1

3.2

3.3

3.4

* * 3.5

4.1

10.1*

10.2*

Agreement and Plan of Merger between WorldCom, Wildcat Acquisition Corp. and Intermedia Communications Inc. dated as amended May 14, 2001 (filed as Annex A to WorldCom’s Registration Statement on Form S-4, Registration No. 333-60482 and incorporated herein by reference) Articles of Amendment to the Second Amended and Restated Articles of Incorporation of WorldCom (amending former Article Seven by inserting Articles Seven D, E, F, and G) (incorporated herein by reference to Exhibit 3.1 to WorldCom’s registration statement on Form S-8 dated August 22, 2001 (Registration No. 333-68204)) Articles of Amendment to the Second Amended and Restated Articles of Incorporation of WorldCom (amending former Article Four by deleting the text thereof and substituting new Article Four) (incorporated herein by reference to Exhibit 3.2 to WorldCom’s registration statement on Form S-8 dated August 22, 2001 (Registration No. 333-68204)) Articles of Amendment to the Second Amended and Restated Articles of Incorporation of WorldCom (amending former Article Eleven by deleting the text thereof and substituting new Article Eleven) (incorporated herein by reference to Exhibit 3.3 to WorldCom’s registration statement on Form S-8 dated August 22, 2001 (Registration No. 333-68204)) Second Amended and Restated Articles of Incorporation of WorldCom (including preferred stock designations), as amended as of May 1, 2000 (incorporated herein by reference to Exhibit 3.4 to WorldCom’s registration statement on Form S-8 dated August 22, 2001 (Registration No. 333-68204))

Restated ByLaws of WorldCom, Inc. (incorporated by reference to Exhibit 3.5 to WorldCom’s registration statement on Form S-8 dated August 22, 2001 (Registration No.

Rights Agreement between WorldCom, Inc. and The Bank of New York, as Rights Agent, dated as of March 7, 2002 (incorporated herein by reference to Exhibit 1 to WorldCom’s Form 8-A dated March 13, 2002 (File No. 0-11258)) 364-Day Revolving Credit Agreement among WorldCom and Bank of America, N.A. and The Chase Manhattan Bank, Co-Administrative Agents; Banc of America Securities LLC and J.P. Morgan Securities Inc., Joint Lead Arrangers and Joint Book Managers; Banc of America Securities LLC, J.P. Morgan Securities Inc., Salomon Smith Barney Inc., ABN Amro Bank N.V. and Deutsche Banc Alex. Brown Inc., Co-Arrangers; Citibank, N.A., Syndication Agent; ABN Amro Bank N.V. and Deutsche Bank AG New York Branch, Co-Documentation Agents; and the lenders named therein dated as of June 8, 2001 (incorporated herein by reference to Exhibit 10.1 to WorldCom’s Current Report on Form 8-K dated June 8, 2001 (filed June 12, 2001) (File No. 0-11258)) Revolving Credit Agreement among WorldCom and Bank of America, N.A. and The Chase Manhattan Bank, Co-Administrative Agents; Banc of America Securities LLC and J.P. Morgan Securities Inc., Joint Lead Arrangers and Joint Book Managers; Banc of America Securities LLC, J.P. Morgan Securities Inc., Salomon Smith Barney Inc., ABN Amro Bank N.V. and Deutsche Banc Alex. Brown Inc., Co-Arrangers; Citibank N.A., Syndication Agent; ABN Amro Bank N.V. and Deutsche Bank AG New York Branch, Co-Documentation Agents; and the lenders named therein dated as of June 8, 2001 (incorporated herein by reference to Exhibit 10.2 to WorldCom’s Current Report on Form 8-K dated June 8, 2001 (filed June 12, 2001) (File No. 0-11258))

333-68204))

E- 1

10.3*

10.4

10.5

10.6

10.7

10.8

10.9

10.10

10.11

10.12

10.13

10.14

10.15

10.16

Amended and Restated Facility A Revolving Credit Agreement among WorldCom, NationsBank, N.A., NationsBanc Montgomery Securities LLC, Bank of America NT & SA, Barclays Bank PLC, The Chase Manhattan Bank, Citibank, N.A., Morgan Guaranty Trust Company of New York, and Royal Bank of Canada and the lenders named therein dated as of August 6, 1998 (incorporated herein by reference to Exhibit 10.1 to WorldCom’s Current Report on Form 8-K dated August 6, 1998 (filed August 7, 1998) (File No. 0-011258)) (incorporated herein by reference to Exhibit 10.3 to WorldCom’s Current Report on Form 8-K dated June 8, 2001 (filed June 12, 2001) (File No. 0-11258)) WorldCom 1999 Stock Option Plan (incorporated herein by reference to Exhibit A to WorldCom’s Proxy Statement dated April 23, 1999 (File No, 0-11258)) (compensatory plan) WorldCom, Inc. Third Amended and Restated 1990 Stock Option Plan (incorporated herein by reference to Exhibit A to WorldCom’s Proxy Statement dated April 22, 1996 (File No. 0-1 1258)) (compensatory plan) WorldCom, Inc. Performance Bonus Plan (incorporated herein by reference to Exhibit A to WorldCom’s Proxy Statement dated April 21, 1997 (File No, 0- 11258)) (compensatory plan) WorldComMFSRJUNET 1995 Performance Option Plan (incorporated herein by reference to Exhibit 10.17 to WorldCom’s Annual Report on Form 10-K for the period ended December 31, 1996 (File No. 0-11258)) (compensatory plan) WorldCodMFSRJUNET Equity Incentive Plan (incorporated herein by reference to Exhibit 10.18 to WorldCom’s Annual Report on Form 10-K for the period ended December 31, 1996 (File No. 0-11258)) (compensatory plan) MCI 1979 Stock Option Plan as amended and restated (incorporated by reference to Exhibit lO(a) to MCI’s Annual Report on Form 10-K €or the fiscal year ended December 31, 1988 (File No. 0-6457)) (compensatory plan) Supplemental Retirement Plan for Employees of MCI Communications Corporation and Subsidiaries, as amended (incorporated by reference to Exhibit 10(b) to MCI’s Annual Report on Form 10-K for the fiscal year ended December 31, 1993 (File No. 0-6457)) (compensatory plan) Description of Executive Life Insurance Plan for MCI Communications Corporation and Subsidiaries (incorporated by reference to “Remuneration of Executive Officers” in MCI’s Proxy Statement for its 1992 Annual Meeting of Stockholders (File No. 0-6457)) (compensatory plan) MCI Communications Corporation Executive Incentive Compensation Plan (incorporated by reference to Exhibit lO(e) to MCI’s Annual Report on Form 10-K for the fiscal year ended December 31, 1995 (File No. 0-6457)) (compensatory plan) Amendment No. 1 to MCI Communications Corporation Executive Incentive Compensation Plan (incorporated by reference to Exhibit lO(e) to MCI’s Annual Report on Form 10-K for the fiscal year ended December 31, 1996 (File No. 0-6457)) (compensatory plan) 1988 Directors’ Stock Option Plan of MCI (incorporated by reference to Exhibit D to MCI’s Proxy Statement for its 1989 Annual Meeting of Stockholders (File No. 0-6457)) (compensatory plan) Amendment No. 1 to the 1988 Directors’ Stock Option Plan of MCI (incorporated by reference to Appendix D to MCI’s Proxy Statement for its 1996 Annual Meeting of Stockholders (File No. 0-6457)) (compensatory plan) Amendment No. 2 to 1988 Directors’ Stock Option Plan of MCI (incorporated by reference to Exhibit lO(i) to MCI’s Annual Report on Form 10-K for the fiscal year ended December 31, 1996) (File No. 0- 6457)) (compensatory plan)

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10.17

10.18

10.19

10.20

10.21

10.22

10.23

10.24

10.25

10.26

10.27

10.28

10.29

10.30

10.31

Amendment No. 3 to 1988 Directors’ Stock Option Plan of MCI (incorporated by reference to Exhibit 100) to MCI’s Annual Report on Form 10-K for the fiscal year ended December 31, 1996 (File No. 0-6457)) (compensatory plan) Stock Option Plan of MCI (incorporated by reference to Exhibit C to MCI’s Proxy Statement for its 1989 Annual Meeting of Stockholders (File No. 0-6457)) (compensatory plan) Amendment No. 1 to the Stock Option Plan of MCJ (incorporated by reference to Exhibit lO(1) to MCI’s Annual Report on Form 10-K for the fiscal year ended December 31, 1996 (File No. 0-6457)) (compensatory plan) Amendment No. 2 to the Stock Option Plan of MCI (incorporated by reference to Appendix B to MCI’s Proxy Statement for its 1996 Annual Meeting of Stockholders (File No. 0-6457)) (compensatory plan) Amendment No. 3 to the Stock Option Plan of MCI (incorporated by reference to Exhibit lO(n) to MCI’s Annual Report on Form 10-K for the fiscal year ended December 31,1996 (File No. 0-6457)) (compensatory plan) Amendment No. 4 to the Stock Option Plan of MCI (incorporated by reference to Exhibit 10(0) to MCI’s Annual Report on Form 10-K for the fiscal year ended December 31, 1996 (File No. 0-6457)) (compensatory plan) Amendment No. 5 to the Stock Option Plan of MCI (incorporated by reference to Exhibit 1O(p) to MCI’s Annual Report on Form 10-K for the fiscal year ended December 31, 1996 (File No. 0-6457)) (compensatory plan) Board of Directors Deferred Compensation Plan of MCI (incorporated by reference to Exhibit 1O(i) to MCI’s Annual Report on Form 10-K for the fiscal year ended December 31, 1994 (File No. 0-6457)) (compensatory plan) The Senior Executive Incentive Compensation Plan of MCI (incorporated by reference to Appendix A to MCI’s Proxy Statement for its 1996 Annual Meeting of Stockholders (File No. 0-6457)) (compensatory plan) Amendment No. 1 to the Senior Executive Incentive Compensation Plan of MCI (incorporated by reference to Exhibit 1O(s) to MCI’s Annual Report on Form 10-K for the fiscal year ended December 31, 1996 (File No. 0-6457)) (compensatory plan) Executive Severance Policy (incorporated by reference to Exhibit 10(a) to MCI’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1996 (File No. 0-6457)) (compensatory plan) Form of employment agreement, effective as of November 2, 1996, between MCI and Bert C. Roberts (incorporated by reference to Exhibit 1O(u) to MCI’s Annual Report on Form 10-K for the fiscal year ended December 31, 1996 (File No. 0-6457)) (compensatory plan) Employment Agreement between UUNET and John W. Sidgmore dated May 13, 1994 (incorporated herein by reference to UUNET’s Registration on Form S-1 (Registration No. 33-91028)) (compensatory plan) Change of Control Severance Agreement effective April 8, 1997 between Brooks Fiber Properties, Inc. (“BFP”) and James C. Allen (incorporated herein by reference from Exhibit 10.1 to BFP’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1997 (File No. 0-28036)) (compensatory plan) Promissory Note dated September 8, 2000 between Bernard J. Ebbers (the “Borrower”) and WorldCom (incorporated herein by reference from Exhibit 10.4 to the WorldCom’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2000) (File No. 0-11258)

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10.32

10.33

10.34

10.35

10.36

10.37

10.38

10.39 21.1 23.1

Promissory Note dated November 1, 2000 between the Borrower and WorldCom (incorporated herein by reference from Exhibit 10.5 to WorldCom’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2000) (File No. 0-11258) Letter Agreement dated November 1, 2000 between the Borrower and WorldCom (incorporated herein by reference from Exhibit 10.6 to WorldCom’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2000) (File No. 0-11258) Limited Guaranty made as of November 14, 2000 by WorldCom in favor of Bank of America, N.A. (incorporated herein by reference from Exhibit 10.7 to WorldCom’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2000) (File No. 0-11258) Limited Guaranty made as of February 12, 2001 by WorldCom in favor of Bank of America, N.A. (incorporated herein by reference from Exhibit 10.35 to WorldCom’s Annual Report on Form 10-K for the year ended December 31, 2000) (File No. 0-11258) Promissory Note dated December 29, 2000 between the Borrower and WorldCom (incorporated herein by reference from Exhibit 10.36 to WorldCom’s Annual Report on Form 10-K for the year ended December 31, 2000) (File No. 01-11258) Promissory note dated September 10, 2001 payable by Borrower to the order of WorldCom (incorporated herein by reference to Exhibit 10.1 to WorldCom’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2001) (File No. 0-11258) First Modification and Reaffirmation of Limited Guaranty dated as of January 25, 2002, by and between WorldCom and Bank of America, N.A. Promissory Note dated January 30, 2002 payable by Borrower to the order of WorldCom Subsidiaries of WorldCom Consent of Arthur Andersen LLP

* The registrant hereby agrees to furnish supplementally a copy of any omitted schedules to this Agreement to the SEC upon request.

No other long-term debt instruments are filed since the total amount of securities authorized under any such instrument does not exceed ten percent of the total assets of WorldCom and its subsidiaries on a consolidated basis. WorldCom agrees to furnish a copy of such instruments to the SEC upon request.

**

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Estados Financieros Consolidados 2001

Documents

Transcript of Estados Financieros Consolidados 2001